The Mount Eden Medical Center is considering establishing

a screening
The Mount Eden Medical Center is considering establishing a screening program for a virulent
form of cancer. If the program were established, the center would have to acquire equipment
that would cost $8.2 million. Thereafter, the center would incur operating costs of $400,000 per
year. The equipment has a useful life of four years. The center estimates that it would screen
3,000 high?risk patients per year. It calculates that 0.2 percent (six) of these will test positive.
With proper treatment, at minimal cost, these patients would be spared the disease. Experts
have determined that if they were not screened and as a consequence developed the disease,
they would incur at least $300,000 per year in medical costs, for a period of two years, before
succumbing to it. The disease would cut short their working lives by an average of 10 years,
during which time they would have earned an average of $28,000 per year.The center uses an
interest rate of 10 percent to assess all long?term projects.1. What would be the annual net
benefits of the program, taking into account the operating costs (excluding the cost of the
equipment), the present value of the medical costs, and the present value of lost earnings?2.
Does the present value of the annual net benefits exceed the cost of the equipment? Based
exclusively on this criterion, should the program be established? What reservations would you
have as to the significance of your analysis?3. Now assume that the analysis uses a discount
rate of 6 percent. Does this change whether the project should be established?4. Assume that
the center has decided to establish the screening program and uses the 10 percent interest
rate. However, the screening could be carried out with equal reliability by physician
examinations coupled with laboratory tests rather than with the special equipment. The annual
cost, however, would be $3 million. Should the center acquire the equipment or carry out the
screening with physician examinations and laboratory tests? Base your analysis on a period of
four years, the life of the equipment.Do you have the same reservations about this analysis as
you did the previous one?View Solution: The Mount Eden Medical Center is considering
establishing a screening
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