Question

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California Health Center, 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 pretax 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 debts losses and contracual allowances, in it's first year of use. Thus, net revenues for year one are estimates 15 * 250 * $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 one. 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 MARCS five-year class for tax depreciation and is subject to the following depreciation allowances: Year Allowance $ 1 $ 600,000 120,000 192,000 2 $ 0.2 0.32 0.19 0.12 3 4 5 6 0.11 0.06 1.00 The hospital tax rate is 40 percent, and its corporate cost of capital is 10 percent.

Answer 1

Solution: Estimating the Project's Net Cash Flows over its Five Year Estimated Life: فورم 4 Estimating the Project's Net Cash Flows over its Five Year Estimated Life: Year 0 2 5 Equipment cost ($600,000.00) Net revenues $300,000.00 $315,000.00 $330,750.00 $347,287.50 $364,651.88 Less: Labor/maintenance costs ($100.000.00) ($105.000.00) ($110,250.00 ($115,762.50 $121,550.63) Utilities costs ($10,000.00) ($10,500.00) ($11,025.00) ($11,576.25) ($12.155.06) Supplies ($18,750.00) ($19.687.50) ($20.671.88) ($21,705.47) ($22.790.74) Incremental overhead ($5,000.00) ($5,250.00) (55,512.50) ($5,788.13) ($6,077.53) Depreciation ($120,000.00) ($192,000.00) ($114,000.00) ($72,000.00 (566,000.00) Operating income $46,250.00 ($17,437.50) $69,290.63 $120,455.16 $136,077.91 Taxes $18,500.00 ($6.975.00) $27,716.25 $48,182.06 $54,431.17 Net operating income $27,750.00 ($10,462.50) $41,574.38 $72,273.09 $81,646.75 Add:: Depreciation $120,000.00 $192,000.00 $114,000.00 $72,000.00 $66,000.00 Plus: After-tax equipment $134,400.00 salvage value* Net cash flow (5600,000.00) $147,750.00 $181,537.50 $155,574.38 $144,273.09 $282,046.75 Working Notes:

After-tax equipment salvages value: Particulars Pretax equipment salvage value MACRS equipment salvage value Difference Taxes After-tax equipment salvage value Amount $200,000.00 $36,000.00 $164,000.00 $65,600.00 $134,400.00

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