solution

Because of a rise in chart requests complicated by constant turnover within the Medical Records Department, Valley Regional wants to replace its existing medical records system with a labor saving optical disk version. The existing system, which has a current book value of $75,000, was purchased three years ago for $120,000 and is being depreciated on a straight-line basis over an eightyear life to zero salvage value. This system could be sold for $65,000 today. The new optical system would reduce the need for staff by three people per year for five years at a savings of $25,000 per person per year; however, it would require additional part-time programming costs to maintain the system at $15,000 per year. The project would not affect the level of net working capital. The new optical system would cost $300,000 and would be depreciated on a straight-line basis over a five-year life to a zero salvage value. The economic life of the new system is five years and the required rate of return on the project is 6 percent.

a. Should the existing medical records system be replaced? Use the incremental NPV approach to evaluate the decision under a non-profit assumption.

b. If the facility were a taxpaying entity with a tax rate of 40 percent, should the existing system be replaced? Use the incremental NPV approach to evaluate the decision. (Hint: see Appendix F.)