Question

Northeast Hospital is analyzing a potential project for a new outpatient center
Please use the following facts to create a 5-year projection of cash flow for the proposed center. Please create your full income statement first to include all cash and non-cash expenses
Calculate the projects NPV, IRR, MIRR, Payback Period (not discounted). Using these calculations, do you recommend that they should proceed with this project? Explain your answer
						Year 1	Year 2	Year 3	Year 4	Year 5
Total projected Visits					52500
Average Revenue per visit					$                       75.00
Average Variable Cost per Visit					$                       50.00
Total Fixed Costs					$         500,000.00
Purchase Price for Equipment					$     4,500,000.00
Monthly Rental Cost to Occupy the New Site					$               5,000.00
Salvage Values of the Equipment (end of Year 5)					$         750,000.00
Corporate Tax Rate					40%
Cost of Capital					8%
Other Assumptions
1) Projected Visits are Expected to increase by 10% in Year 2, 5% in Year 3 and 3% each Year thereafter
2)  Negotiation with payers indicate that revenue rate (ie payment per visits) will increase by 2% each year and 5% in year 5
3)  Variable Costs are expected to rise at a rate of 2% per year
4) Fixed Costs are expected to rise at a rate of 1% per year
6) Rent rates will be increased by 2.5% at the end of each year
6) The equipment will depreciate based on the straight-line method of depreciation, a 5-year estimated life and the equipment will be sold at salvage value at the end of year 5
7)  Tax rate will remain constant for the entire 5-year Period and do not assume any tax loss carryforward

Answer 1

No they should not proceed with project as the project is not even able to earn cost of capital over the period.

	Year 1	Year 2	Year 3	Year 4	Year 5
Project visits	52,500.00	57,750.00	60,637.50	62,456.63	64,330.32
Revenue Rate p.v.	75.00	76.50	78.03	79.59	83.57
Variable cost p.v.	50.00	51.00	52.02	53.06	54.12
Contribution p.v.	25.00	25.50	26.01	26.53	29.45
Total Contribution	1,312,500.00	1,472,625.00	1,577,181.38	1,656,986.75	1,894,432.95
Fixed Cost	500,000.00	505,000.00	510,050.00	515,150.50	520,302.01
Rent	60,000.00	61,500.00	63,037.50	64,613.44	66,228.77
Depreciation	750,000.00	750,000.00	750,000.00	750,000.00	750,000.00
EBT	2,500.00	156,125.00	254,093.88	327,222.82	557,902.18
Tax	1,000.00	62,450.00	101,637.55	130,889.13	223,160.87
EAT	1,500.00	93,675.00	152,456.33	196,333.69	334,741.31
Depreciation	750,000.00	750,000.00	750,000.00	750,000.00	750,000.00
Total earning for fund provider	751,500.00	843,675.00	902,456.33	946,333.69	1,084,741.31
Asset Residual value					750,000.00
Cash Flow	751,500.00	843,675.00	902,456.33	946,333.69	1,834,741.31

Cash outflow at 0 period	-4,500,000
Cost of Capital	8%
Cash Flow	Present Value		Discount @5%
-4,500,000	-4,500,000		-4,500,000
751,500.00	695,833	751500/(1.08)	715,714
843,675.00	723,315	843675/(1.08)^2	765,238
902,456.33	716,399	902456/(1.08)^3	779,576
946,333.69	695,584	946333/(1.08)^4	778,551
1,834,741.31	1,248,694	1084741/(1.08)^5	1,437,568
NPV	-420,175		-23,353
IRR	0.0482	5%-3%/(420175-23353)*23353
	4.82%
Payback period=	4.576	4+ 1/1834741*1056035