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franklin county hospital a nonprofit hospital bought and installed a new computer sy 598146

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?

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