Franklin County Hospital, a nonprofit hospital, bought and installed a new computer system last year for $150,000. The system is designed to relay information between labs and medical units. Charlene Walker, the hospital’s new computer specialist, had a meeting with Lou Campbell, vice president of finance. She began: “Lou, today I read in a journal that a new computer system has just been introduced. It costs $100,000, but I believe that by replacing our old system, we could reduce operating and maintenance costs that are now being incurred.” The following are Walker’s estimates:
|
Present System |
New System |
|
|
Purchase and installment price |
$150,000 |
$100,000 |
|
Useful life when purchased |
6 years |
5 years |
|
Computer operating costs per year |
$45,000 |
$30,000 |
|
Computer operating and maintenance |
$25,000 |
$12,000 |
|
costs per year |
||
|
Depreciation expenses per year |
$10,833 |
$20,000 |
|
Cost of capital |
10% |
10% |
a. Based on an analysis, what advice do you recommend that Walker give Campbell?
b. At what price for the new computer system would Campbell be indifferent?
c. Is this a typical make-or-buy decision? Why?