The radiology department of Community Hospital two years ago purchased an imaging device that cost

$750,000. Its expected useful life was five years; however, this year an improved version of the imaging device is available. The improved version costs $900,000 but has a shorter operating life of three years.

The improvements to the device are lower annual operating costs (down from $650,000 to $360,000)

and 8 percent increased throughput. The increased throughput should boost current annual revenues of

$1,000,000 proportionately but not affect other operations or costs. The present imaging device could be disposed of and sold now for $350,000, but both the present and replacement device will have zero disposal values in three years.

Required BUILD YOUR OSWPN READSHEET. Build an Excel spreadsheet financial model to analyze the device replacement decision.

b. What is (1) the percentage throughput or (2) the amount of new operating costs that equate the net benefits of the two imaging devices? (Hint: Use Excel’s Solver wizard.)

c. Why might a manager in this situation not replace the old equipment? Should Community Hospital replace the imaging device? Explain.