Evaluating a Capital Expense Using the Payback Method

The Happy Healing Hospital CFO has just sent a memo to all departments requesting a list of any capital expenses along with the justification for each item requested. The decision bring the Release of Information copy service back to in house rather than outsourcing it. You have already completed the research for leasing verses purchasing the equipment to be used for the project. At this point, it is a matter of deciding which option would be best financially and writing the justification for your recommendations to present at the weekly department meeting.

To Purchase

You estimate that to purchase there will be an initial investment of $34,000 for a printer/fax/copy machine and dedicated computer. The estimated income will be $55,000 over the next 5 years. Current staff will be used.

Complete the table below.

(Hint: Your remaining balance will be carried over as the investment for the following year.)

Payback Method for Evaluating Capital Expense

Year	Average Net Income	Initial Investment	Remaining
0	0	$34,000
1	$3,000	$34,000 - $3,000 =	$31,000
2	$7,000
3	$10,000
4	$15,000
5	$20,000
Total	$55,000

To Lease

Your research shows that the same equipment will cost $3,000 per month to lease with no initial investment. However, there is a maintenance contract that will cost an additional $150 per month. Create a table to show these expenses.