The Aravinda Hospital operates its own laundry. During the current year, the laundry is on course to process 132,000 kg of washing and in the year about to start, the total is forecast to grow to 145,200 kg. This growth in laundry processed is forecast to continue at the same percentage rate for the next seven years which is the medium forecast, although it could possibly grow at a rate of up to 20% or as little as 2%. Because of this growth, the hospital must immediately replace its existing laundry equipment. Currently, it is considering two options, the purchase of Machine A or the rental of Machine B. Information on both options is given below. Aravinda Hospital is able to call on an outside laundry if there is either a breakdown or any other reason why the washing cannot be undertaken in-house. The cost will be 10 per kilogram of washing. Machine A if purchased would have to be paid for immediately. All other cash flows can be assumed to occur at the end of each year. Machine A will have no scrap value at any time. The existing laundry equipment could be sold for 10,000 cash. The fixed costs are a direct cost of operating the laundry. The hospitals discount rate for projects of this nature is 15%.

a) Using discounted cashflow techniques, evaluate the 2 options for operating the laundry over the next 3 years, using the forecast of medium growth. (15 marks)

b) State any other factors that the Aravinda Hospital should consider when making a decision. (9 marks)

c) Explain what is meant by the time value of money and why we would use discounted cash flow techniques to evaluate this decision but not payback. (6 marks)