Okmulgee Hospital (a large metropolitan for-profit hospital) is considering replacing its MRI equipment with a new model manufactured by a different company. The old MRI equipment was acquired three years ago, has a remaining life of five years, and will have a salvage value of $100,000. The book value is $2,000,000. Straight-line depreciation with a half-year convention is being used for tax purposes. The cash operating costs of the existing MRI equipment total $1,000,000 per year. The new MRI equipment has an initial cost of $5,000,000 and will have cash operating costs of $500,000 per year. The new MRI will have a life of five years and a salvage value of $1,000,000 at the end of the fifth year. MACRS depreciation will be used for tax purposes. If the new MRI equipment is purchased, the old one will be sold for $500,000. The company needs to decide whether to keep the old MRI equipment or buy the new one. The cost of capital is 12 percent. The combined federal and state tax rate is 40 percent. Required: Compute the NPV of each alternative. Should the company keep the old MRI equipment or buy the new one?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

Solutions

Chapter
Section
Chapter 19, Problem 29P
Textbook Problem

Okmulgee Hospital (a large metropolitan for-profit hospital) is considering replacing its MRI equipment with a new model manufactured by a different company. The old MRI equipment was acquired three years ago, has a remaining life of five years, and will have a salvage value of $100,000. The book value is $2,000,000. Straight-line depreciation with a half-year convention is being used for tax purposes. The cash operating costs of the existing MRI equipment total $1,000,000 per year.

The new MRI equipment has an initial cost of $5,000,000 and will have cash operating costs of $500,000 per year. The new MRI will have a life of five years and a salvage value of $1,000,000 at the end of the fifth year. MACRS depreciation will be used for tax purposes. If the new MRI equipment is purchased, the old one will be sold for $500,000. The company needs to decide whether to keep the old MRI equipment or buy the new one. The cost of capital is 12 percent. The combined federal and state tax rate is 40 percent.

Required:

Compute the NPV of each alternative. Should the company keep the old MRI equipment or buy the new one?

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Chapter 19 Solutions

Cornerstones of Cost Management (Cornerstones Series)
Ch. 19 - What are the principal tax implications that...Ch. 19 - Explain why the MACRS method of recognizing...Ch. 19 - Explain the important factors to consider for...Ch. 19 - Explain what a postaudit is and how it can provide...Ch. 19 - Explain what sensitivity analysis is. How can it...Ch. 19 - Jan Booth is considering investing in either a...Ch. 19 - WeCare Clinic is planning on investing in some new...Ch. 19 - Carsen Sorensen, controller of Thayn Company, just...Ch. 19 - Manzer Enterprises is considering two independent...Ch. 19 - Keating Hospital is considering two different...Ch. 19 - Warren Company plans to open a new repair service...Ch. 19 - Each of the following scenarios is independent....Ch. 19 - The following cases are each independent of the...Ch. 19 - Each of the following scenarios is independent....Ch. 19 - Roberts Company is considering an investment in...Ch. 19 - NPV A clinic is considering the possibility of two...Ch. 19 - Refer to Exercise 19.11. 1. Compute the payback...Ch. 19 - Buena Vision Clinic is considering an investment...Ch. 19 - Consider each of the following independent cases....Ch. 19 - Gina Ripley, president of Dearing Company, is...Ch. 19 - Covington Pharmacies has decided to automate its...Ch. 19 - Postman Company is considering two independent...Ch. 19 - Lilly Company is planning to buy a set of special...Ch. 19 - An investment of 2,000 produces a net cash flow of...Ch. 19 - Which of the following is a deficiency of the...Ch. 19 - Assume there are two competing projects, X and Y....Ch. 19 - Thomas Company is investing 10,000 in a project...Ch. 19 - Assume that an investment of 100,000 produces a...Ch. 19 - Heaps Company produces jewelry that requires...Ch. 19 - Sweeney Manufacturing has a plant where the...Ch. 19 - Ron Booth, the CEO for Sunders Manufacturing, was...Ch. 19 - Kent Tessman, manager of a Dairy Products...Ch. 19 - Friedman Company is considering installing a new...Ch. 19 - Okmulgee Hospital (a large metropolitan for-profit...Ch. 19 - Mallette Manufacturing, Inc., produces washing...Ch. 19 - Jonfran Company manufactures three different...Ch. 19 - Brindon Thayn, president and owner of Orangeville...

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