Huntington Medical Center purchased a used low-field MRI scanner 2 years ago for
ID: 1172151 • Letter: H
Question
Huntington Medical Center purchased a used low-field MRI scanner 2 years ago for $445,000. Its operating cost is $325,000 per year and it can be sold for $145,000 anytime in the next 3 years. The Center’s director is considering replacing the presently owned MRI scanner with a state-of-the-art 3 Tesla machine that will cost $1.5 million.The operating cost of the new machine will be $260,000 per year, but it will generate extra revenue that is expected to amount to $525,000 per year. The new unit can probably be sold for $850,000 3 years from now. You have been asked to determine how much the presently owned scanner would have to be worth on the open market for the AW values of the two machines to be the same over a 3-year planning period. The Center’s MARR is 9% per year.
The presently owned scanner should be worth $ on the open market.
Explanation / Answer
Cash out flow for New machine is 1500000-145000
1355000
Savings on operating expenses is 325000-260000
65000
extra revenue from new machine
525000
Total additional inflow from new machine is 525000+65000 per year
590000
Cash flow at the end of the year is 590000+850000
1440000
If the old machine is sold today
Year
PV factor @9%
New machine
PV cash flows
0(today)
1
-1355000
-1355000
1
0.9174
590000
541284
2
0.8417
590000
496591
3
0.7722
1440000
1111944
Net cash flow
794820
Hence it is suggested to sell the old machine and buy new machine
Cash out flow for New machine is 1500000-145000
1355000
Savings on operating expenses is 325000-260000
65000
extra revenue from new machine
525000
Total additional inflow from new machine is 525000+65000 per year
590000
Cash flow at the end of the year is 590000+850000
1440000
If the old machine is sold today
Year
PV factor @9%
New machine
PV cash flows
0(today)
1
-1355000
-1355000
1
0.9174
590000
541284
2
0.8417
590000
496591
3
0.7722
1440000
1111944
Net cash flow
794820
Hence it is suggested to sell the old machine and buy new machine
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