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Briggs-Gridley Memorial Hospital, a non-taxpaying entity, is starting a new inpatient heart center on its third...

Briggs-Gridley Memorial Hospital, a non-taxpaying entity, is starting a new inpatient heart center on its third floor. The expected patient volume demands will generate $5,000,000 per year in revenues for the next 5 years. The new center will incur operating expenses, excluding depreciation, of $3,000,000 per year for the next 5 years. The initial cost of building and equipment is $7,000,000. Straight-line depreciation is used to estimate depreciation expense, and the building and equipment will be depreciated over a 5 year life to its salvage value of $800,000. The cost of capital for this project is 10%.

  1. Compute the NPV to determine the financial feasibility of this project.
  2. Compute the IRR to determine the financial feasibility of this project.
  3. Compute the NPV to determine the financial feasibility of this project if Briggs-Gridley was a tax-paying entity with a tax rate of 30%.
  4. Compute the IRR to determine the financial feasibility of this project if Briggs-Gridley was a tax-paying entity with a tax rate of 30%. (Hint: see Appendix E. Because the organization is depreciating to the salvage value, there is no tax effect on the sale of the asset.)
  5. Does paying taxes affect the financial feasibility(accept or reject) decision of this project? Answer YES or NO

Solutions

Expert Solution

Calculation of NPV and IRR without taxes :

Accept the project as it has Positive NPV ad IRR.

Calculation of NPV and IRR with a tax rate of 30%.

Accept the project as it has Positive NPV ad IRR.

No,  paying taxes does not affect the financial feasibility(accept or reject) decision of this project because in both the cases NPV is positive and IRR is more than cost of capital.

jeff jeffy answered 1 year ago
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