Question

Two manufacturers provide MRI systems for medical images. St. Jude's Hospital wants to replace its current...

Two manufacturers provide MRI systems for medical images.

St. Jude's Hospital wants to replace its current magnetic resonance equipment that it purchased 8 years ago with a newer technology system. The K system will have an initial cost of $ 1, 600,000, an operating cost of $ 70,000 per year, and a salvage value of $ 400,000 after its 4-year life. The L system will have an initial cost of $ 2, 100,000, an operating cost of $ 50,000 the first year with an expected increase of $ 3,000 per year after, and no salvage value after its 8-year life. Which system should be selected on the basis of a future value analysis at an interest rate of 12% per year?

Select the system option and future value closest to the correct value.

System K, with a VF = $ -6,310,780
System L, with a VF = $ -5,922,079
System K, with a VF = $ -5,922,079
System L, with a VF = $ -6,310,780

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Answer #1

The correct choice is System L, with a VF = $ -5,922,079

The future value of system K = - $1,600,000 ( 1+0.12)4 - $ 70,000 ( 1+0.12)3 -  $ 70,000 ( 1+0.12)2 -  $ 70,000 ( 1+0.12) - $ 70,000 + $ 400,000

The future value of system K = -$2,452,183.94

The future value of system L = - $2,100,000 ( 1+0.12)8 -  $ 50,000 ( 1+0.12)7 -  $ 53,000 ( 1+0.12)6 -  $ 56,000 ( 1+0.12)5 -  $ 59,000 ( 1+0.12)4 -  $ 62,000 ( 1+0.12)3 -  $ 65,000 ( 1+0.12)2  -  $ 68,000 ( 1+0.12)1 - $ 71,000

The future value of system L    $ -5,922,079

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