Missionaries of Charity Hospital is reviewing ways of cutting the costs of stock
ID: 2471309 • Letter: M
Question
Missionaries of Charity Hospital is reviewing ways of cutting the costs of stocking medical supplies. Two new stockless systems are being considered to lower the hospital's holding and handling costs. The hospital's industrial engineer has compiled the relevant financial data for each system, as follows, where dollar values are in millions: The system life of eight years represents the contract period with the medical suppliers. If the hospital's MARR is 15%, which system is more economical?Explanation / Answer
Current Price X0 Just in time system X1 Stock less supply system X2 Comparison between X0 and X1 Year X0 X1 X1-X0 0 0 -2500000 -2500000 1-8 year -7000000 -4500000 2500000 IRR(X1-X0) 99.6%>15% So X1 is better Now comparision between X1 and X2 Year X1 X2 X2-X1 0 -2500000 -5000000 -2500000 1-8 year -4500000 -2500000 2000000 Irr (x2-X1) 79.25>15% X2 is better. Most economical is stock less supply system Note IRR where NPV is 0 Year Cash Flow X1-X0 Discount factor 99.6% Discounnted cash Flow Cash Flow X2-X1 Discount factor 79.25% Discounnted cash Flow 0 -2500000 1 -2500000 -2500000 1 -2500000 1 2500000 0.5010 1252505 2000000 0.5579 1115760 2 2500000 0.2510 627507.5 2000000 0.3112 622460.3 3 2500000 0.1258 314382.5 2000000 0.1736 347258.2 4 2500000 0.0630 157506.3 2000000 0.0969 193728.4 5 2500000 0.0316 78910.96 2000000 0.0540 108077.2 6 2500000 0.0158 39534.55 2000000 0.0301 60294.13 7 2500000 0.0079 19806.89 2000000 0.0168 33636.89 8 2500000 0.0040 9923.291 2000000 0.0094 18765.35 Total 77.01739 Total -19.3697 IRR Near to 0