Your career as the administrator at Alpine Ambulatory Surgery Center continues with some decisions on replacing capital equipment. The anesthesiologist has let you know that the anesthesia machine in one of your three (3) operating rooms has failed. Repairs for the anesthesia machine can be made at a cost of $18,000 and will have a warranty to work for at least one more year. It is currently generating $8,000 a year in cash inflows and would expect to be at that level for at least the next four (4) years.
Replacing the unit would cost $55,000 and it would last for seven (7) years. You can get $4,000 in trade in for your current malfunctioning unit if you buy a replacement and could sell the replacement for $8,000 at the end of its seven year expected life. Your accountant estimates that the project will have the following annual cash inflows:
Year 1: $10,000
Year 2: $12,000
Year 3: $14,000
Year 4: $16,000
Year 5: $18,000
Year 6: $18,000
Year 7: $18,000
Your cost of capital is 7%.
Using this data, make a recommendation on repair/replacement of the anesthesia machine. You must show a calculation to support your recommendation. Recommendations without justifications (including some math) will not be accepted.