Add-or-drop with net present value analysis (builds on material in Chapters Six and Seven). Franklin County Hospital, a nonprofit hospital, bought and installed a new computer system last year for $90,000. 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 said: “Lou, today I read in a journal that a new computer system has just been introduced. It costs $50,000, but I believe that by replacing our old system, we could reduce operating and maintenance costs that are now being incurred.” The following are Walker’s estimates:

a. Based on an analysis, what advice should Walker give Campbell?

b. At what price for the new computer system would Campbell be indifferent on this decision?

c. Is this a typical make-or-buy decision? Why or why not?

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Purchase and installment price Useful life when purchased Computer operating costs per year Computer operating and maintenance costs per year Present System $90,000 6 years New System $50,000 5 years $25,000 $8,000 $35,000 $15,000 Depreciation expenses per year $15,000 $10,000 Cost of capital 10% 10%