Add/Drop with Net Present Value Analysis (Builds on material in Chapters 6 and 7). Franklin County Hospital, a non-profit hospital, bought and installed a new computer system last year for $65,000. The system is designed to relay information between labs and medical units. Charlene Walker, the hospital’s new computer specialist, had a meeting with Lou Campbell, Vice President of Finance. She began: “Lou, today I read in a journal that a new computer system has just been introduced. It costs $42,000, but I believe that by replacing our old system, we could reduce operating and maintenance costs that are now being incurred.” The following are Ms Walker’s estimates:

a. Based on an analysis, what advice do you recommend that Charlene give Lou?

b. At what price for the new computer system would Lou be indifferent?

c. Is this a typical make-or-buy decision? Why?

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Present System Purchase and installment price New System $65,000 $42,000 Useful life when purchased 6 years 5 years Computer operating costs per year $30,000 $20,000 Computer operating and maintenance costs per year $20,000 $18,000 Depreciation expenses per year $10,833 $18,000 Cost of capital 10% 10%