Question

California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000 has an expected life of five years and an estimated pre-tax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project's life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses and contractual allowances, in its first year of use. Thus, net revenues for Year 1 are estimated at 15 x 250 x $80 = $300,000.

Labor and maintenance costs are expected to be $100,000 during the first year of operation, while utilities will cost another $10,000 and cash overhead will increase by $5,000 in Year 1. The cost for expendable supplies is expected to average $5 per procedure during the first year. All costs and revenues, except depreciation, are expected to increase at a 5 percent inflation rate after the first year.

The equipment falls into the MACRS five-year class for tax depreciation and its subject to the following depreciation allowances:

Year	Allowance
1	0.20
2	0.32
3	0.19
4	0.12
5	0.11
6	0.06
	1.00

The hospital's tax rate is 40 percent, and its corporate cost of capital is 10 percent.

QUESTION:

a. Estimate the project's net cash flows over its five-year estimated life:

	Year
	0	1	2	3	4	5
Equipment cost
Net revenues
Less: Labor/maintenance costs
Utilities costs
Supplies
Incremental overhead
Depreciation
Operating income
Taxes
Net operating income
Plus: Depreciation
Plus: Equipment salvage value
Net cash flow

b. What are the project's NPV and IRR? (Assume for now that the project has average risk).

PLEASE SHOW ALL WORK.

Answer 1

All calculations are rounded off to nearest digits, Final answer may slightly vary..