The Atlantic Medical Clinic can purchase a new computer system that will save $7,000 annually in billing costs. The computer system will last for eight years and have no salvage value.

The Atlantic Medical Clinic can purchase a new computer system that will save $7,000 annually in billing costs. The computer system will last for eight years and have no salvage value.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

What is the maximum price (i.e., the price that exactly equals the present value of the annual savings in billing costs) that the Atlantic Medical Clinic should be willing to pay for the new computer system if the clinic’s required rate of return is: (Round your final answer to the nearest whole dollar amount.)

 

Explanation

From Exhibit 13B-2, the factor for 10% for 8 periods is 5.335. The computer system should be purchased only if its net present value is positive. This will occur only if the purchase price is less:

$7,000 × 5.335 = $37,345

From Exhibit 13B-2, the factor for 13% for 8 periods is 4.799. Therefore, the maximum purchase price would be:

$7,000 × 4.799 = $33,593

Thanks