Present value of purchasing or renting machinery The Portsmere Hospital operates its own laundry. Last year the laundry processed 120 000 kilograms of washing and this year the total is forecast to grow to 132000 kilograms. This growth in laundry processed is forecast to continue at the same percentage rate for the next seven years. Because of this, the hospital must immediately replace its existing laundry equipment. Currently, it is consid- ering two options, the purchase of machine A or the rental of machine B. Information on both options is given below:

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Machine A purchase Annual capacity (kilograms) Material cost per kilogram 180000 2.00 3.00 Labour cost per kilogram Fixed costs per annum 20 000 3 years Life of machine Capital cost Depreciation per annum Machine B - rent Annual capacity (kilograms) Material cost per kilogram Labour cost per kilogram Fixed costs per annum Rental per annum Rental agreement Depreciation per annum 60000 20000 170 000 1.80 3.40 18000 20 000 3 years nil