Eastbay Hospital has an auxiliary generator that is used when power failures occur. The generator is worn out and must be either overhauled or replaced with a new generator. The hospital has assembled the following information:
|
Present
Generator |
New
Generator |
| Purchase cost new |
$ |
15,200 |
|
$ |
18,400 |
|
| Remaining book value |
$ |
8,200 |
|
|
- |
|
| Overhaul needed now |
$ |
7,200 |
|
|
- |
|
| Annual cash operating costs |
$ |
16,100 |
|
$ |
9,300 |
|
| Salvage value-now |
$ |
3,200 |
|
|
- |
|
| Salvage value-seven years from now |
$ |
2,200 |
|
$ |
4,400 |
|
|
|
If the company keeps and overhauls its present generator, then the generator will be usable for seven more years. If a new generator is purchased, it will be used for seven years, after which it will be replaced. The new generator would be diesel-powered, resulting in a substantial reduction in annual operating costs, as shown above.
|
|
The hospital computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 16% discount rate. (Ignore income taxes.)
|
|
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
|
| 1a. |
Determine the net present value using the total-cost approach. (Negative amounts should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
|
|
Net Present Value |
| Purchase new generator |
$ |
| Overhaul and keep old generator |
$ |
|
| 1b. |
Should Eastbay Hospital keep the old generator or purchase the new one? |
|
|
|
|
Should purchase the new generato |
|
Keep the old generator |
|
| 2. |
Using the incremental approach, determine the net present value in favor (or against) purchasing the new generator? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
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