Question

Austin General Hospital is evaluating new lab equip ment. The interest rate is 12% and in each case the equipment's useful life is 5 years. Use NPW analysis to pick which company you should purchase from. 5-64 Company $13,500 $20,000 $15,000 1,500 1,800 1,100 Annual benefit 9,500 11,000 9,000 Salvage value 3,500 6,000 4,000 First cost O&M costs

Answer 1

Ans: You should purchase from  company A .

Explanation:

NPW of company A :

Net Annual benefits = Annual benefits - Annual O & M costs

= $9500 - $1500 = $8000

NPW = - 13500 + 8000 ( P / A , i ,n ) + 3500( P / F , i ,n )

= - 13500 + 8000 ( P / A , 12% ,5 ) + 3500( P / F , 12% ,5 )

= - 13500 + 8000 ( 3.6048 ) + 3500(0.5674 )

= -13500 + 28838.4 + 1985.9

= -13500 + 30824.3

= $17324.3

NPW of company B :

Net Annual benefits = Annual benefits - Annual O & M costs

= $11000 - $1800 = $9200

NPW = - 20000 + 9200 ( P / A , i ,n ) + 6000( P / F , i ,n )

= - 20000 + 9200( P / A , 12% ,5 ) + 6000( P / F , 12% ,5 )

= - 20000 + 9200 ( 3.6048 ) + 6000(0.5674 )

= -20000 + 33164.16 + 3404.4

= -20000+ 36568.56

= $16568.56

NPW of company C :

Net Annual benefits = Annual benefits - Annual O & M costs

= $9000 - $1100 = $7900

NPW = - 15000+ 7900 ( P / A , i ,n ) + 4000 ( P / F , i ,n )

= - 15000+ 7900( P / A , 12% ,5 ) + 4000( P / F , 12% ,5 )

= - 15000+ 7900( 3.6048 ) + 4000(0.5674 )

= -15000+ 28477.92 + 2269.6

= -15000+ 30747.52

= $15747.52

Since the NPW of company A is more than that of other two companies , you should purchase from the company A .