A medical lab wants to upgrade its MRI machine. Their financial department assessed that the lab will add about $250,000 to their annual revenues. The cost of operating and maintaining the new machine is $15,000 per year, and additional labor & material expenses will be $40,000 yearly. The lab expects to use the new MRI for five years, after which its salvage value will be zero. The MRI machine falls into a three-year class MACRS depreciation. The lab’s tax rate is 40% and its after-tax MARR is 16%.
A) How much can the lab afford to pay for the MRI machine?
B) Vendor A, who offers the MRI machine at the price determined in question a) states that the lab's annual revenues will be $290,000, while vendor B offers to sell them the MRI machine for $420,000. In both cases all the other givens remain unchanged. Which vendor should the company choose?