In: Accounting
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 hence is subject to the following depreciation allowances:
Year | Allowance |
1 | 0.2 |
2 | 0.32 |
3 | 0.19 |
4 | 0.12 |
5 | 0.11 |
6 | 0.06 |
The hospital's tax rate is 40 percent, and its corporate cost of capital is 10 percent. Assume that the project has average risk.
What is the project's NPV?
Note: Format is $xx,xxx
What is the project's IRR?