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1. A local hospital system is planning to buy a new ultrasound machine. They have selected a machine that costs $400,000. In addition, it has an annual operating cost of $80,000 for each of the next two years. The forecast is about 4000 ultrasounds a year. The variable cost is $40 per ultrasound. The average revenue would be $100 per ultrasound. The hospital has gone ahead and paid $200,000 as the first instalment of the machine. This is a non-returnable transaction.

Now there is a new machine available, with a cost of $300,000. It has an annual operating cost of $80,000 for each of the two years. Variable cost is $30 per ultrasound. The volumes and revenues would be the same as for the first machine.

Give a recommendation to the hospital about which machine they could buy, in terms of costs/profits. Explain.

Assume the study period is 2 years. The salvage cost would be the same for both at the end of two years. Ignore the time value of money.