Kern Valley Hospital, a taxpaying entity, wants to replace its current labor-intensive telemedicine system with a new automated version that would cost $3,500,000 to purchase.

This new system has a five-year life and would be depreciated on a straight-line basis to a salvage value of $350,000. The current telemedicine system was purchased five years ago for $1,600,000, has five years remaining on its useful life, and would be depreciated similarly to a salvage value of $300,000. This current system could be sold in the marketplace now for $350,000. The new telemedicine system has annual labor operating costs of $185,000, whereas the current system has annual labor operating costs of $1,000,000.

Neither system will change patient revenues. The hospital has a 40 percent tax rate and a required rate of return of 7 percent. The financial analysis will be projected over a fiveyear period. Use the NPV approach to determine if the new telemedicine system should be selected. (Hint: see Appendix F.)