You have been promoted to Assistant Director of your Laboratory Department. One of your first assignments...

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Finance

You have been promoted to Assistant Director of your LaboratoryDepartment. One of your first assignments is to prepare arecommendation for the replacement of one of your CoulterCounters.
Your Department Director has asked that you work with theFinancial staff in preparing this recommendation. Upon contactingthe financial staff they tell you that their department has lost anumber of analysts and ask if you could help in preparing theanalysis since you are a recent graduate of SHU. You tell them thatyou are well versed in Capital Decision making and would be able tocomplete the analysis for them and submit to your DepartmentDirector.
You decide to prepare a Net Present ValueAnalysis and begin the discussions with your staff. Theyemphasize to you the importance of replacing theexisting equipment due to quality and safety concerns for thepatient. You first plan on completing a Time Line and from thediscussion with the staff plan on incorporating the followingassumptions in your analysis:
Assumptions to use:
Time Line for 5 years
Initial cost of equipment $3000000
Additional volume from increased efficiency 1000 test permonth
Average reimbursement per test is $50
Cost of supplies will be reduced by $2000 per month
The existing equipment is fully depreciated
The only other expense is the depreciation for the new equipmentand it is a non cash item
The financial staff tells you to use 5% as your Cost ofCapital
What would be the NPV for your analysis?
What would be your recommendation to your Director basedon both your quantitative analysis and also qualitativeissues?

Answer & Explanation Solved by verified expert

4.1 Ratings (714 Votes)

Answer 1 Year 0 Initial cost 3000000 Year 1 to 5 Annual cash flow Additional revenue Saving in cost of supplies 1000 12 50 2000 12 624000 As there is no tax there is no See Answer

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Transcribed Image Text

You have been promoted to Assistant Director of your LaboratoryDepartment. One of your first assignments is to prepare arecommendation for the replacement of one of your CoulterCounters.Your Department Director has asked that you work with theFinancial staff in preparing this recommendation. Upon contactingthe financial staff they tell you that their department has lost anumber of analysts and ask if you could help in preparing theanalysis since you are a recent graduate of SHU. You tell them thatyou are well versed in Capital Decision making and would be able tocomplete the analysis for them and submit to your DepartmentDirector.You decide to prepare a Net Present ValueAnalysis and begin the discussions with your staff. Theyemphasize to you the importance of replacing theexisting equipment due to quality and safety concerns for thepatient. You first plan on completing a Time Line and from thediscussion with the staff plan on incorporating the followingassumptions in your analysis:Assumptions to use:Time Line for 5 yearsInitial cost of equipment $3000000Additional volume from increased efficiency 1000 test permonthAverage reimbursement per test is $50Cost of supplies will be reduced by $2000 per monthThe existing equipment is fully depreciatedThe only other expense is the depreciation for the new equipmentand it is a non cash itemThe financial staff tells you to use 5% as your Cost ofCapitalWhat would be the NPV for your analysis?What would be your recommendation to your Director basedon both your quantitative analysis and also qualitativeissues?