A hospital has to evaluate a budget request for a new boiler room. The hospital’s engineer has stated that if he does not have a boiler room, then three additional maintenance men should have to be hired to maintain the present room for two shifts per day and the week ends. The average salary for a maintenance man is $750.00 per month. Presently, the maintenance and parts of the boiler cost $1,000.00 per month. A new boiler room with a new boiler is expected to cost $500,000.00 Its maintenance costs are expected to be $500.00 per month. The depreciable life of the new boiler is 20 years. The engineer estimates that at the longest, the present boiler would last 5 more years even with additional maintenance and would cost $550,000.00 to replace in 5 years. The old boiler still has $41,650.00 to be depreciated. If the new boiler is to be purchased, it will be purchased with cash.Required: Using the information above, calculate the net present value of costs (cash outflows) and decide whether it should be purchased in the budget year. Assume a 10 per cent cost of capital (discount rate).
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