The Hospital needs to purchase a new CDI system for use with the current hospital EHR.

One firm (Firm A) requires an up-front payment of $250,000 and an annual maintenance payment of $25,000 at the time the contract is signed. Thereafter, maintenance payments of $30,000 are due at the beginning of each anniversary year for a total of 5 maintenance payments (including the initial payment made at time of purchase).

The other firm (Firm B) requires an up-front payment of $325,000 and an annual maintenance payment of $5,000 at the time the contract is signed. Thereafter, maintenance payments of $7,000 are due at the beginning of each anniversary year for a total of 5 maintenance payments (including the initial payment made at time of purchase).

Installation, other initial set up and equipment costs, will be $60,000 for either product. Both vendors quoted on-site training for staff will cost $5,000 and occur at the time of implementation. No ongoing training costs were noted in either proposal because the $5,000 includes “training a trainer.”

At the end of the third year, you are required to pay an additional fee for a system and equipment upgrade effective the first of the fourth year. The additional fee is $60,000. Each vendor offers a webinar to train staff on the new upgraded features and the fee is $650. The fee is payable along with the upgrade fee.

The new system will improve operations in the department and is estimated to help the hospital's case mix index and could generated an extra $120,000 over each of the next 5 years. The CFO states that he can earn 5% interest on the hospital’s funds. He will not consider any project that yields less than a 20% return. Cost Accounting states the useful life of this acquisition is 5 years, and there is no residual value after 5 years.

1. Calculate the present value of the outlays (costs of each option) and inflows (savings of each option). Show your calculations. (you may use the present value tables in Burton & Dunn Chapter 10 page 199, or the formula calculations as illustrated by the NPV documents in “Course Documents Unit 3” on blackboard)
2. Calculate the net present value of each option. Show your calculations.
3. Calculate the payback of each option (use the actual numbers and not the present values). Show your calculations.
4. Calculate the average rate of return of each option (use the actual numbers, not the present values). Show your calculations.
5. Prepare a written recommendation to your administrator in a professional memo format recommending the firm whose product you would like to purchase. The recommendation should be professionally written. Justify your choice by showing all of your calculations and providing a thorough rationale from an analysis of the net present value, payback and average rate of return calculations.