Question

VI. The Gold Hospital currently sends it laboratory tests to an outside

       laboratory for processing. The Gold Hospital is considering processing

       the laboratory tests itself, instead of sending the laboratory tests to

       the outside laboratory. The outside laboratory charges $75 per

       laboratory test. If the Gold Hospital processes the laboratory tests

       itself, it is estimated that the laboratory tests can be processed at a

       variable cost of $65 per laboratory test. If the Gold Hospital

       processes the laboratory tests itself, equipment with an estimated

       useful life of 3 years must be purchased at a cost of $275,000. The

       equipment will have an estimated salvage value of $0 at the end of 3

       years. The Gold Hospital estimates that it will administer 10,000

       laboratory tests in year 1, 11,000 laboratory tests in year 2, and

       12,000 laboratory tests in year 3.

        Required:

            1. Determine whether the Gold Hospital should process the

                laboratory tests itself. Assume that the Gold Hospital

                requires a 7% return on its investment.

Answer 1

Net saving per test
Cost from other laboratory			75
Less: variable cost of prcessing the test inhouse	65
Net saving per test				10
Net cash savings per year
			Year1	YEar2	YEar3	Total
Number of tests performed	10,000	11,000.00	12,000.00
Multiply: Savings per test	10	10.00	10
Cash savings per year	1,00,000	1,10,000.00	1,20,000
Multiply: PVF at 7%		0.93458	0.87344	0.81630
Present value of Cash inflows	93457.94	96078.26	97955.75	287492
Present value of cash inflows	287492
Less: Initial investment	2,75,000
Net present value		12,492
The Proposal must be undertaken