Dr. David Dunn is adding a new piece of diagnostic equipment to the department. Two similar models are offered by two different vendors, and both models would serve the needs of the clinic. both also have an estimated useful life of five years, with no salvage value at the end of the five years. the only difference is the cost. Model A cost $120,000 est labo saving of &40,000. Model B cost &110,000 Estimated labor savings $32,000. the straight line depreciation is used and a target rate of return of 15% for all equipment with a useful life over two years and a payback period of three years.

To determine which model of diagnostic equipment is the best choice, we need to consider the cost, labor savings, useful life, depreciation method, target rate of return, and payback period.

1. Cost: Model A costs $120,000, while Model B costs $110,000.

2. Labor Savings: Model A offers an estimated labor savings of $40,000, while Model B offers $32,000 in labor savings.

3. Useful Life: Both models have an estimated useful life of five years with no salvage value at the end.

4. Depreciation Method: The problem states that straight-line depreciation is used. This means that the same amount is depreciated each year over the useful life. To calculate the annual depreciation, we divide the cost of the equipment by the useful life.

5. Target Rate of Return: The target rate of return for all equipment with a useful life over two years is 15%.

6. Payback Period: The payback period is the time it takes to recoup the initial investment. In this case, the payback period is three years.

Let's calculate the relevant figures and compare the two models:

For Model A:
- Annual depreciation: $120,000 / 5 years = $24,000
- After three years, the accumulated depreciation will be $24,000 * 3 = $72,000
- Remaining book value after three years: $120,000 - $72,000 = $48,000
- Labor savings after three years: $40,000

For Model B:
- Annual depreciation: $110,000 / 5 years = $22,000
- After three years, the accumulated depreciation will be $22,000 * 3 = $66,000
- Remaining book value after three years: $110,000 - $66,000 = $44,000
- Labor savings after three years: $32,000

Now, let's analyze the results based on the target rate of return and payback period:

- Model A's labor savings after three years ($40,000) cover the initial investment, making it meet the payback period requirement. Additionally, the accumulated depreciation after three years is $72,000, which means that it provides a return of (labor savings + accumulated depreciation) / initial investment = ($40,000 + $72,000) / $120,000 = 1.1. This meets the target rate of return of 15%.

- Model B's labor savings after three years ($32,000) do not cover the initial investment, so it fails to meet the payback period requirement. Additionally, the accumulated depreciation after three years is $66,000, which means that it provides a return of (labor savings + accumulated depreciation) / initial investment = ($32,000 + $66,000) / $110,000 = 0.98. This fails to meet the target rate of return of 15%.

Based on these calculations, Model A is the better choice as it meets both the payback period and the target rate of return requirements.