Replacement Decision, Computing After$-$Tax Cash Flows, Basic NPV Analysis

Okmulgee Hospital $($a large metropolitan for$-$profit hospital$)$ is considering replacing its MRI equipment with a new model manufactured by a different company. The old MRI equipment was acquired three years ago, has a remaining life of five years, and will have a salvage value of $$100,000.$ The book value is $$2,000,000.$ Straight$-$line depreciation with a half$-$year convention is being used for tax purposes. The cash operating costs of the existing MRI equipment total $$1,000,000$ per year.

The new MRI equipment has an initial cost of $$5,000,000$ and will have cash operating costs of $$500,000$ per year. The new MRI will have a life of five years and a salvage value of $$1,000,000$ at the end of the fifth year. MACRS depreciation will be used for tax purposes. If the new MRI equipment is purchased, the old one will be sold for $$500,000.$ The company needs to decide whether to keep the old MRI equipment or buy the new one. The cost of capital is $12$ percent. The combined federal and state tax rate is $25$ percent.

You must use the Exhibit $19$B$\mathrm{.}1$ and Exhibit $19$B$\mathrm{.}2$ present value tables and Exhibit $19\mathrm{.}5$ to solve the following problems.

Required:

Compute the NPV of each alternative. When required, round your computations and final answers to the nearest dollar. If the NPV is negative, enter your answer as a negative value.

Old MRI equipment$fill in the blank $1$New MRI equipment$fill in the blank $2$

Should the company keep the old MRI equipment or buy the new one?

Should buy the new MRI equipmentShould keep the old MRI equipment