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Equipment Replacement

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Assuming that you are a hospital administrator and you realize that a major piece of medical equipment needs to be replaced in five (5) years time, determine how much money needs to be set aside from the hospital's monthly revenues for the next sixty (60) months in order to pay for the anticipated expenditure which currently has a list price of one and a half million dollars ($1,500,000)? The prevailing interest rate is four and a half percent (4.5%) per annum. The rate of inflation is assumed to be six percent (6.0%) per year for this type of equipment. The anticipated expenditure will be paid all at once, that is, it will not be purchased on 'credit' in a manner of speaking.

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At the time of the equipment purchase (six years from now) the price of the equipment is projected to be $1,500,000 * (1.06)^5 = $2,007,338.37.
It is assumed that this is an ...

Solution Summary

This solution calculated the monthly annuity savings in order to replace a piece of equipment in the future.

$2.19
See Also This Related BrainMass Solution

Project evaluation and equipment replacement

The company decides to buy the new equipment to replace the existing equipment that was acquired five years ago at a cost of $5,000,000.
Research fee $80,000 was spent last year for the new equipment. The information of the existing equipment and the proposed new equipment are shown as follows:

The existing equipment is expected to provide eight more years of service if major repairs of $588,000 are performed three years from now. Annual cash operating costs total $3,000,000 and are not expected to change in future periods. The estimated market value of the existing equipment in eight years is $735,000. Your company may sell the existing equipment now for $3,528,000 and buy the new equipment.

The new equipment has a service life of eight years, is expected to reduce operating costs by $882,000 annually, and has an estimated residual value of $2,646,000. Major repairs of $220,500 for the new equipment will be necessary at the end of the fifth year of operation. Moreover, to finance the new equipment, it appears that your company would have to borrow $3,000,000 at 7% interest annually from the OPEN Bank.

If IRR is 15%, would you please tell me how to find out the maximum price that the company would be willing to pay for the new equipment? Ignore taxes.

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