Question

Huntington Medical Center purchased a used low-field MRI scanner 2 years ago for $445,000. Its operating cost is $325,000 per year and it can be sold for $145,000 anytime in the next 3 years. The Center’s director is considering replacing the presently owned MRI scanner with a state-of-the-art 3 Tesla machine that will cost $1.5 million.The operating cost of the new machine will be $260,000 per year, but it will generate extra revenue that is expected to amount to $525,000 per year. The new unit can probably be sold for $850,000 3 years from now. You have been asked to determine how much the presently owned scanner would have to be worth on the open market for the AW values of the two machines to be the same over a 3-year planning period. The Center’s MARR is 9% per year.

The presently owned scanner should be worth $  on the open market.

Answer 1

Cash out flow for New machine is 1500000-145000					1355000
Savings on operating expenses is 325000-260000					65000
extra revenue from new machine					525000
Total additional inflow from new machine is 525000+65000 per year					590000
Cash flow at the end of the year is 590000+850000					1440000
If the old machine is sold today
Year	PV factor @9%	New machine	PV cash flows
0(today)	1	-1355000	-1355000
1	0.9174	590000	541284
2	0.8417	590000	496591
3	0.7722	1440000	1111944
Net cash flow			794820
Hence it is suggested to sell the old machine and buy new machine