Eastbay Hospital has an auxiliary generator that is used when power failures occur. The generator is worn out and must be either overhauled or replaced with a new generator. The hospital has assembled the following information:

If the company keeps and overhauls its present generator, then the generator will be usable for eight more years. If a new generator is purchased, it will be used for eight years, after which it will be replaced. The new generator would be diesel-powered, resulting in a substantial reduction in annual operating costs, as shown above.
The hospital computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 16% discount rate.
Required:
(Ignore income taxes.)
1. Should Eastbay Hospital keep the old generator or purchase the new one? Use the total-cost approach to net present value in making your decision.
2. Redo (1) above, this time using the incremental-costapproach.

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Present New Generator Generator $16,000 $20,000 Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-eight years from now $9000 $8,000 $12,500 $7,500 $4,000 $3,000 S6,000