Question

The HIM department and the business office of Community Hospital would like to merge their funds to purchase an industrial shredder. Currently, an outside vendor comes in and shreds old documents twice a month at the cost of $27,000.00 per year. The hospital requires a payback period of four years. The department’s return on investment (ROI) is 25 percent. The total cost of the shredder that the department would like to purchase is $8,509.00. Taking into consideration time, man-power, and the cost of running the equipment, the savings would be $2,123.00 per year. Round to two decimal places.

The payback period is _________________ years.

Expressed as a percent, the return on investment is (round to two decimal places) _______________

Would the shredder come out of the operational budget or the capital budget?

Yes or no, with the information above taken into consideration, should the shredder be purchased?

Question 20 options:

Answer 1

a) required to find payback period :

given that

initial cost of shredder=8509

annual savings=2123

payback period=initial cost shredder/annual savings

=8059/2123
  
=4.008

therefore the payback period is 4 years

b)return on investment :

return on investment = annual savings/initial cost

=2123/8509

=0.2495

% of return on investment=0.2495*100

=24.95
therefore % of return on investment =24.95%

c)from the above we can say that the decision is to be made about purchase of shredder

so its a capital budget decision

d)since the payback period is more than require and return on investment is less than required i.,e 25% and shredder should not be purhased