Los Angeles County Hospital is planning to purchase a new piece of medical equipment with a...

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Finance

Los Angeles County Hospital is planning to purchase a newpiece of medical equipment with a list price of $3,000,000. Themedical equipment supplier presents County with two offers:
Offer 1: County can purchase the medical equipment at a 10%discount off the list price, but it must pay the final(post-discount) price today.

Offer 2: County can purchase the medical equipment at a 5%discount off the list price with two-year, no-cost financing. Underthis offer, half of the final (post-discount) price must be paid atthe end of year 1, and the remaining half must be paid at the endof year 2.

a. Which offer should County accept if their estimate of theopportunity cost rate is 10%?

b. Which offer should County accept if their updated estimateof the opportunity cost rate is 1%?

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Part a Offer 1 Present value of offer 1 Post discount price of the equipment List price 1 Discount rate 3000000 1 010 3000000 090 2700000 Offer 2 Present value of cash outflows for offer 2 PV of the first half of the postdiscount payment PV of the second half of the postdiscount payment PV of the first half of the postdiscount payment PV of the second See Answer

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