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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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Solution Summary

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

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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 ...

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