County Hospital is planning to purchase a new piece of medical equipment with a list price of $3,000,000. The medical equipment supplier has been experiencing low sales volume due to the recession and is currently offering special pricing to boost sales. The medical equipment supplier provides County Hospital with the following two alternative offers:
Offer 1: County can purchase the medical equipment at a 10 percent discount (sale price) if it pays full amount at the time of purchase.
Offer 2: County can purchase the medical equipment at a 5 percent discount (sale price) with two-year, no-cost financing. If County chooses Offer 2, half of the final purchase price will be due at the end of Year 1 and half of the final purchase price will be due at the end of Year 2.
Assume County has enough cash available to take advantage of either offer and will not need to borrow any money to complete the purchase.
A. Which offer should County Hospital take if its risk-adjusted opportunity cost of capital is 10 percent?
B. Which offer should County Hospital take if its risk-adjusted opportunity cost of capital is 1 percent?
C. Explain why your answers were either the same or different for parts A and B.
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