Problem 1132: 11.32 The estimated future market values and M&O; costs for an in-

Question

Problem 1132: 11.32 The estimated future market values and M&O; costs for an in-place backup generator at MediCare Hospital and a possible replacement are shown below. Mrs. Jamison, Hospital Director, told you that she is interested only in what happens over the next 3 years. If the current generator is to be re- placed, it must be done now or kept in-place for the 3 years. Using an interest rate of 10% per year and a 3-year study period, determine whether or not the replacement is economically advantageous Year Value, S M&O; Cost, $ Value, M&O; Cost, $ 0 40,000 1 32,000-55,000 65,000 -37.000 -37,000 -37,000 19,000 38,000 -39.000 2 23.000 55,000 9,000 - 3 11,000 -55,000 11,000

Explanation / Answer

Assume no taxes If current generator kept in place for next three years Year Net ourflow Discount rate PV 0 1                     -   1            (55,000) 0.909091         (50,000) 2            (55,000) 0.826446         (45,455) 3            (44,000) 0.751315         (33,058) NPV of Total Outflow 2.486852     (1,28,512) Annual Expense=-128512/2.486852    -51,676.74 in Zero year, no outflow as it is existing generator If current Generator to replace now: Year Net ourflow Discount rate PV 0            (40,000) 1         (40,000) 1            (37,000) 0.909091         (33,636) 2            (37,000) 0.826446         (30,579) 3            (37,000) 0.751315         (27,799) 4            (37,000) 0.683013         (25,271) 5            (37,000) 0.620921         (22,974) NPV of Total Outflow 3.790787     (1,80,259) Annual Expense=-180259/3.790787    -47,551.90 Since annual expense in case of new generator is low , so it is recommended to buy new generator now Working Notes: Net out flow in year zero if new generator to be purchased Total cost of the new generator           80,000 Less: Sales value of Old Generator           40,000 Net out flow           40,000

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