Question

The Atlantic Medical Clinic can purchase a new computer system that will save $11,000 annually in billing costs. The computer system will last for nine years and have no salvage value.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:

What is the maximum price (i.e., the price that exactly equals the present value of the annual savings in billing costs) that the Atlantic Medical Clinic should be willing to pay for the new computer system if the clinic’s required rate of return is: (Round your final answers to the nearest whole dollar amount.)

1. Eight Percent

2. Eleven Percent

Answer 1

1. If the required return is 8%,

Maximum price = Present value of annual savings in billing cost

= $ 11000 * PVIFA @ 8% for 9 years

= $ 11000 * 6.2468879

= $ 68715.77

= $ 68716

Therefore Atlantic Medical Clinic would be willing to pay maximum $ 68716 for the new computer system

Note : Here PVIFA is the cummulative total of all the present value factors @ 8 % for 9 years

2. If the required return is 11%

Maximum price = Present value of annual savings in billing cost

= $ 11000 * PVIFA @ 11% for 9 years

= $ 11000 * 5.5370475

= $ 60907.52

= $ 60908

Therefore Atlantic Medical Clinic would be willing to pay maximum $ 60908 for the new computer system

Note : Here PVIFA is the cummulative total of all the present value factors @ 11 % for 9 years