In: Accounting
Allegheny Community Hospital is a nonprofit hospital operated by
the county. The hospital’s administrator is considering...
Allegheny Community Hospital is a nonprofit hospital operated by
the county. The hospital’s administrator is considering a proposal
to open a new outpatient clinic in the nearby city of New Castle.
The administrator has made the following estimates pertinent to the
proposal.
- Construction of the clinic building will cost $640,000 in two
equal installments of $320,000, to be paid at the end of 20x0 and
20x1. The clinic will open on January 2, 20x2. All staffing and
operating costs begin in 20x2.
- Equipment for the clinic will cost $55,000, to be paid in
December of 20x1.
- Staffing of the clinic will cost $520,000 per year.
- Other operating costs at the clinic will be $58,000 per
year.
- Opening the clinic is expected to increase charitable
contributions to the hospital by $110,000 per year.
- The clinic is expected to reduce costs at Allegheny Community
Hospital. Annual cost savings at the hospital are projected to be
$720,000.
- A major refurbishment of the clinic is expected to be necessary
toward the end of 20x5. This work will cost $85,000.
- Due to shifting medical needs in the county, the administrator
doubts the clinic will be needed after 20x9.
- The clinic building and equipment could be sold for $110,000 at
the end of 20x9.
- The hospital’s hurdle rate is 12 percent.
Use Appendix A for your reference. (Use appropriate
factor(s) from the tables provided.)
Required:
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1-3. Fill in the following table to compute the
net present value of the proposed outpatient clinic.
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4. Should the administrator recommend to the
hospital's trustees that the clinic be built
Complete this question by entering your answers in the
tabs below.
Fill in the following table to compute the net present value of
the proposed outpatient clinic. (Negative amounts should be
indicated by a minus sign. Round your "Discount factors" to 3
decimal places.)
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Type of Cash Flow |
20x0 |
20x1 |
20x2 |
20x3 |
20x4 |
20x5 |
20x6 |
20x7 |
20x8 |
20x9 |
1. |
Construction of clinic |
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2. |
Equipment purchase |
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3. |
Staffing |
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4. |
Other operating costs |
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5. |
Increased charitable contributions |
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6. |
Cost savings at hospital |
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7. |
Cost of refurbishment |
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9. |
Salvage value |
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Incremental cash flow |
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Discount factor |
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Present value |
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Net present value |
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Should the administrator recommend to the hospital's trustees
that the clinic be built?