Question

For your analysis assume that the ASC uses a 9% discount rate for projects of this risk level, and that they will use a five-year time horizon. This is a taxexempt not-for-profit organization so there will not be any income tax effects to consider in the calculations

After buying the equipment the center is expected to generate gross revenues of $95,000 each year in the first two years and it is expected to increase to $125,000 each year in the next three years. The services will be paid for by third parties and there is a demand for this new service. Deductions from revenue are expected to average 25% of gross revenues in each of the five years. The initial equipment cost is $180,000 and will cost $30,500 to install. After five years the equipment will be retired, and it is expected that it could be sold for $27,000.   

The costs for the service include part-time staffing costs of $11,000 and supply costs of $8,500 in each of the first two years. For the last three years, salaries are expected to be $15,000 and supplies are estimated to be $11,500 in each of those last three years. The equipment is under warranty in the first year so there is no extra fee paid. A maintenance contract costing $8,500 per year will be paid in years 2 through 5.   

Required:   

1. Set up the spreadsheet by inputting the above assumptions in the appropriate cells.

2. Summarize your answer in the following table and note whether this is an attractive project from a purely financial point of view.   

Summarize your answer in the following table:

Description Your Answer

Net Present Value of Cash Flows: Internal Rate of Return:

Is this an attractive project from a purely financial point of view based upon the numbers that you calculated above? Why did you make that decision?

all info is provided :)

Answer 1

NOTE : Did not consider depreciation as it an NGO and tax is exempt for it.

Formula Sheet for reference