Question

A local hospital has been contracting with an Air-Med company to provide helicopter medical airlift service for critical patients from the surrounding rural area. The company has proposed a 10-year contract that would charge the hospital $15,000 per flight hour. The hospital is considering purchasing their own helicopter and hiring a flight crew themselves. A helicopter can be purchased for $5 Million that could be sold in 10 years for $1 Million. Additionally, the fixed operating cost of the helicopter (crew, maintenance, etc.) would cost $1 Million per year plus an additional $1,500 per flight hour in fuel. Use Annual Equivalent Worth Analysis to determine the minimum number of hours the hospital would need to operate their own helicopter to break even compared to the contract if the hospital's MARR = 8%.

Answer 1

Let the number of hours of operations be x per year

AW of outsourcing=15000x

Cost of helicopter=I=$5,000,000

Salvage=S=$1,000,000

Annual operation and fuel coss=AOFC=1000000+1500x

AW of purchase option=(I-S)*(A/P,0.08,10)+S*i+AOFC

AW of purchase option=(5000000-1000000)*(A/P,0.08,10)+1000000*8%+1000000+1500x

Let us calculate the interest factor

AW of purchase option=(5000000-1000000)*0.14902949+1000000*8%+1000000+1500x =

1676117.96+1500x

Set AWs of both options equal to find the breakeven value of x

1676117.96+1500x=15000x

13500x=1676117.96

x=1676117.96/13500=124.15689 or say 124.16 hours/year