A new instrument capable of performing 40,000 tests per year has a purchase price of $15,000,000. The installation will cost 10% of the purchase price. The manufacturer covers maintenance costs for the first year in the purchase price. Thereafter, it will cost $200,000 per year for a maintenance contract.

Assume the following:

• The instrument will generate added test volume at a rate of 15,000 tests in the first year, and this amount will increase annually by 10,000 tests/year.
• You can charge $250 per test.
• The collection rate is 80%.
• You will be able to reduce the workforce by 10 FTEs, each of which is paid a salary of $50,000/year.
• The fringe benefits rate for workers is 20% of the salary.
• The hurdle rate for this opportunity is 7.0%.

Use the data presented to determine:

1. benefit/cost ratio
2. the net present value
3. the average payback period for the proposed equipment acquisition.

Then, decide whether the opportunity should be pursued and explain your reason(s).

Answer rating: 100% (QA)

Firstly calculate the amount capitalised to the asset The cost of asset to be incorpor... View the full answer