The Portsmere Hospital operates its own laundry. Last year the laundry processed 120,000 kilograms of washing and this year the total is forecast to grow to 132 000 kilograms. This growth in laundry processed is forecast to continue at the same percentage rate for the next seven years. Because of this, 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:

Machine A purchase

Annual capacity (kilograms) 180 000

Material cost per kilogram 2.00

Labour cost per kilogram 3.00

Fixed costs per annum 20 000

Life of machine 3 years

Capital cost 60 000

Depreciation per annum 20 000

Machine B rent

Annual capacity (kilograms) 170 000

Material cost per kilogram 1.80

Labour cost per kilogram 3.40

Fixed costs per annum 18 000

Rental per annum 20 000

Rental agreement 3 years

Depreciation per annum nil

Other information:

1. The 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 charge would be

10 per kilogram of washing.

2. Machine A, if purchased, would have to be paid for immediately. All other cash

flows can be assumed to occur at the end of the year.

3. Machine A will have no residual value at any time.

4.The existing laundry equipment could be sold for 10 000 cash.

5. The fixed costs are a direct cost of operating the laundry.

6. The hospitals discount rate for projects of this nature is 15%.

evaluate the two options for operating the laundry, using discounted cash flow

techniques;

(b) recommend the preferred option and identify one possible non-financial benefit;