Question

The Atlantic Medical Clinic can purchase a new computer system that will save $4,000 annually in billing costs. The computer system will last for seven years and have no salvage value. Click here to view Exhibit 12B-1 and Exhibit 12B-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 answers to the nearest whole dollar amount.) This is a numeric cell, so please enter numbers only. 1. Eleven 2. Twelve percent

Answer 1

The maximum price that the Atlantic Medical Clinic should be willing to pay for the new computer system can be determined by calculating the present value of the annual savings in billing costs.

Step-by-step explanation:

The maximum price that the Atlantic Medical Clinic should be willing to pay for the new computer system can be determined by calculating the present value of the annual savings in billing costs. The present value can be calculated by discounting the future cash flows using the appropriate discount factor. Based on the provided information, the appropriate discount factor for an 11% required rate of return is 5.889 and for a 12% required rate of return is 5.665.

To find the maximum price, we divide the annual savings in billing costs ($4,000) by the discount factor. For an 11% required rate of return, the maximum price would be $680 and for a 12% required rate of return, the maximum price would be $707.