A hospital has a permanent need for a piece of theatre equipment costing £48,000. The fixed annual running cost is £2000 and maintenance charges are estimated at £3000 in the first year, rising annually at a rate of 15% thereafter. The equipment’s useful life is eight years and equipment cost is written off on a straight-line depreciation basis. If the cost of capital is calculated to be 10%, when is the best time to replace the equipment, and what is the annual equivalent cost? Would the answer change if the equipment’s life was extended to 12 years, given that depreciation is zero over this extended period?
(Answer: Modify the equipment-depreciation model of Figure