Question

An Ambulatory Surgery Center (ASC) has been presented with a proposal to offer a new diagnostic procedure that would require the purchase of a specialized piece of equipment. This piece of equipment offers physicians the opportunity to diagnose many types of medical conditions. You've been asked by the Center’s administrator to use the techniques of preparing a discounted cash flow analysis to evaluate it from an economic point of view by computing the Net Present Value and Internal Rate of Return.

Assumptions:

For your analysis assume that the ASC uses a 7% discount rate for projects of this risk level, and that they will initially use a five-year time horizon. This is a tax-exempt not-for-profit organization so there will not be any income tax effects to consider in the calculations.

The business after buying the equipment is expected to generate gross revenues of $100,000 each year in the first two years and is expected to be $120,000 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 equipment cost is $210,000 and will cost $14,988 to install. After five years the equipment will be retired and it is expected that it could be sold for $25,000.

The costs for the service include part-time staffing costs of $12,000 and supply costs of $10,000 in each of the first two years. For the last three years, salaries are expected to be $14,000 and supplies are estimated to be $12,000 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 $6,000 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?

Answer 1