Queen Victoria Hospital, a for-profit institution, wants to replace its CT scanner with a new model. The cost of the new CT scanner is $5 million. The current CT scanner was purchased three years ago for $3 million. The new scanner has a five-year life and will be depreciated over a straight-line basis to a salvage of $2 million. The current CT scanner has five years remaining on its life and will be depreciated over a straight-line basis to a salvage value of $1 million. The current scanner could be sold in the marketplace for $2.5 million. The new scanner is expected to generate annual cash labor savings of $500,000 per year relative to the current scanner. Neither system will change patient revenues. The hospital has a 40 percent tax rate and required rate of return of 5 percent. The financial analysis will project over a five-year period. Use the Net Present Value approach to determine if the new CT scanner should be selected. (Hint: see Appendix F.)
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