Problem 19.29 Replacement Decision, Computing After-Tax Cash Flows, Basic NPV Analysis

Okmulgee Hospital (a large metropolitan for-profit hospital) is considering replacing its MRI equipment with a new model manufactured by a different company. The old MRI equipment was acquired three years ago, has a remaining life of five years, and will have a salvage value of $100,000. The book value is $2,000,000. Straight-line depreciation with a half-year convention is being used for tax purposes. The cash operating costs of the existing MRI equipment total $1,000,000 per year.

The new MRI equipment has an initial cost of $5,000,000 and will have cash operating costs of $500,000 per year. The new MRI will have a life of five years and a salvage value of $1,000,000 at the end of the fifth year. MACRS depreciation will be used for tax purposes. If the new MRI equipment is purchased, the old one will be sold for $500,000. The company needs to decide whether to keep the old MRI equipment or buy the new one. The cost of capital is 12 percent. The combined federal and state tax rate is 40 percent.

You must use the Exhibit 19B.1 and Exhibit 19B.2 present value tables and Exhibit 19.5 to solve the following problem.

Required:

Compute the NPV of each alternative. When required, round your computations and final answers to the nearest dollar. If the NPV is negative, enter your answer as a negative value.

Old MRI equipment	$
New MRI equipment	$

Should the company keep the old MRI equipment or buy the new one? - Select your answer -Should keep the old MRI equipmentShould buy the new MRI equipmentItem 3

EXHIBIT 19B.2 Present Value of an Annuity of $1 in Arrears Periods 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 40% 0.980 0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833 0.820 0.806 0.794 0.781 0.769 0.758 0.714 1.942 1.866 1.833 1.783 1.736 1.690 1647 1.605 1.566 1.528 1.492 1.457 1.424 1.392 1.361 1.331 1.224 2.884 2.775 2.673 2.577 2.487 2.402 2.322 2.246 2.174 2.106 2.042 1.981 1.923 1.868 1.816 1.766 1.589 3.808 3.630 3.465 3.312 3.170 3.037 2.914 2.798 2.690 2.589 2.494 2.404. 2.320 2.241 2.166 2.096 1.849 4.713 4.452 4.212 3.993 3.791 3.605 3433 3.274 3.127 2.991 2.864 2.745 2.635 2.532 2436 2.345 2.035 5.601 5.242 4.917 4.623 4.355 4.11 3.889 3.685 3.498 3.326 3.167 3.020 2.885 2.759 2.643 2.534 2.168 6,472 6.002 5.582 5.206 4,868 4.564 4.288 4.039 3.812 3.605 3.416 3.242 3,083 2.937 2.802 2.677 2.263 7.325 6.733 6.210 5.747 5.335 4.968 4.639 4.344 3.078 3.837 3.619 3.421 3.241 3.076 2.925 2.786 2.331 8.162 7.435 6.802 6.247 5.759 5.328 4.946 4.607 4.303 4.031 3.786 3.566 3.366 3.184 3.019 2.868 2.379 10 8.983 8.111 7.360 6.710 6.145 5.650 5.216 4.833 4.494 4.192 3.923 3.682 3.465 3.269 3.092 2.930 2.414 9.787 8.760 7887 7.139 6.495 5.938 5.453 5.029 4.656 4.327 4.035 3.776 3.543 3.335 3.147 2.978 2.438 12 10.575 9.385 8.384 7.536 6.814 6.194 5.660 5. 197 4.793 4.439 4.127 3.85 3.606 3.387 3.190 3.013 2.456 13 11.348 9.986 8.853 7.904 7.103 6.424 5.842 5.342 4.910 4.533 4.203 3.912 3.656 3.427 3.223 3.040 2.469 14 12.106 10.563 9.295 8.244 7.367 6,628 6.002 5.468 5.008 4.611 4.265 3.962 3.695 3.459 3.249 3.061 2.478 15 12.849 11.118 9.712 8.559 7.606 6811 6.142 5.575 5.092 4.675 4.315 4.001 3,726 3.483 3.268 3.076 2.484 16 13,578 11,652 10,106 8.85 7,824 6.974. 6.265 5.668 5.162 4.730 4.357 4.033 3.751 3.503 3.283 3.088 2.489 17 14.292 12.166 10.477 9.122 8.022 7.120 6.373 5.749 5.222 4.775 4.39 4.059 3.77 3.518 3.295 3.097 2.492 18 14.992 12.659 10.828 9.372 8.201 7.250 6.467 5.818 5.273 4.812 4.419 4.080 3.786 3.529 3.304 3.104 2.494 19 15.678 13.134 11.158 9.604 8,365 7.366 6.550 5.877 5.316 4.843 4.442 4.097 3.799 3.539 3.311 3.109 2.496 20 16.35 13.590 11.470 9.818 8.514 7.469 6.623 5.929 5.353 4.870 4.460 4.110 3.808 3.546 3.316 3.113 2.497 17.011 14.029 11.764 10.017 8.649 7.562 6687 5.973 5.384 4.891 4.476 4.12 3.816 3.551 3.320 3.116 2.498 22 17.658 14.451 12.042 10.201 8.772 7.645 6.743 6.011 5.410 4.909 4.488 4.130 3.822 3.556 3.323 3.118 2.498 23 18.292 14.857 12.303 10.37 8.883 7.718 6.792 6.044 5432 4.925 4.499 137 3.827 3.559 3.325 3.120 2.499 24 18.914 15.247 12.550 10.529 8.985 7.784 6.835 6.073 5.451 4.937 4.507 4.143 3.831 3.562 3.327 3.121 2.499 25 19.523 15.622 12.783 10.675 9.077 7.843 6.873 6.097 5.467 4.948 4.514 147 3.834 3.564 3.329 3.122 2.499 26 20.12 15.983 13.003 10.810 9.16 7.896 6906 6.118 5.480 4.956 4.520 4.15 3.837 3.566 3.330 3.123 2.500 20.707 16.330 13.211 10.935 9.237 7.943 6.935 6.136 5.492 4.964 4.524 4,154 3.839 3.567 3.331 3.123 2.500 21.281 16.663 13.406 11.051 9.307 7.984 6.96 6.152 5.502 4.970 4.528 4.157 3.840 3.568 3.33 3.124 2.500 29 21.844 16.984 13.591 11.158 9.370 8.022 6.983 6.166 5.510 4.975 4.531 4,159 3,841 3,569 3.332 3.124 2.500 30 22.396 17.292 13.765 11.258 9.427 8.055 7.003 6.177 5.517 4.979 4.534 4,160 3,842 3.569 3.332 3.124 2.500