Question

The General Hospital Imaging Director wants to purchase a new MRI Scanner. She is evaluating two manufacturers to see which scanner would work best for her. She also needs to convince her boss that using the resources needed to replace the old MRI scanner is the right decision and then take it to the Capital Equipment Evaluation Committee. Both scanners are very similar in what they can provide clinically, so there is no real advantage there. However, both scanners are a significant upgrade to the current equipment and could provide safer scans for patients, faster scans so they may be able to perform more studies per day, and the new scanners meet all the new regulatory codes for magnet safety. Machine A has a cost of $2,000,000. However, it will save $250,000 per year in operating costs, reduced supplies and maintenance costs, compared to the current scanner. Machine B has a cost of $1,250,000. It will save $100,000 in operating costs, reduced supplies and maintenance, per year compared to the current machine. They both have a useful life of 10 years. Machine A will have a salvage value of $500,000 and Machine B will have a salvage value of $250,000.

Compute the Payback for each machine. Please show all your work and calculations. Compute the Net Book Value of both machines at 5 years. Then evaluate which MRI scanner you think would be the best proposal to bring forward based on what you learned from the assumptions above and the calculations you did. Write up an SBAR report that you would share with your boss and then take to the Capital Equipment Evaluation Committee that would defend your proposal. Include Payback times, any possible startup costs, include all the reasons that would convince the committee to spend the money to get this equipment. Be specific in your reasoning and include everything that you think would get you more votes from the committee.

Answer 1

Payback period of Machine A = 2000000/250000 =	8.00	years
Payback period of Machine B = 1250000/100000 =	12.50	years
NBV of Machine A at EOY 5:
Annual depreciation = (2000000-500000)/10 =	$     1,50,000
Cumulative depreciation for 5 years = 150000*5 =	$     7,50,000
NBV of Machine A at EOY 5 = 2000000-750000 =	$   12,50,000
NBV of Machine B at EOY 5:
Annual depreciation = (1250000-250000)/10 =	$     1,00,000
Cumulative depreciation for 5 years = 100000*5 =	$     5,00,000
NBV of Machine A at EOY 5 = 1250000-500000 =	$     7,50,000
EVALUATION:
Machine A gives a lower Payback period and is hence
preferable over Machine B. Machine B will not get paid back
within its useful life of 10 years.