Problem 7

A new instrument capable of performing 40,000 tests per year has a purchase price of $15,000,000. Installation will cost 10% of the purchase price. The manufacturer covers maintenance costs for the first year in the purchase price. Thereafter, it will cost $200,000 per year for a maintenance contract.

Assume the following:

• The instrument will generate added test volume at a rate of 15,000 tests in the first year, and this amount will increase annually by 10,000 tests/year.
• You can charge $250 per test.
• Collection rate is 80%.
• You will be able to reduce the workforce by 10 FTEs, each of which is paid a salary of $50,000/year.
• The fringe benefits rate for workers is 20% of the salary.
• The hurdle rate for this opportunity is 7.0%.

Use the data presented to determine:

1. benefit/cost ratio
2. the net present value
3. the average payback period for the proposed equipment acquisition.

Then, decide whether the opportunity should be pursued and explain your reason(s).