California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment,

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California Health Center A For Profit Hospital Is Evaluating The Purchase Of New Diagnostic Equipment The Equipment 1 (51.34 KiB) Viewed 9 times

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 1 2 3 4 5 6 Allowance 0.2 0.32 0.19 0.12 0.11 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? Note: Format is xx.x% This is a tough and lengthy problem to solve....take your time and think things through. Depreciation, taxes, salvage value and inflation. are all in play on this problem..