Georgia Health Center, a for profit hospital, is evaluating the purchase of a new diagnostic equipment. The equipment, which cost $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 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. The cost for expendable supplies is expected to average $5 per procedure during the first year. Cash overhead will increase by $5,000 in Year 1. All costs and revenues, except depreciation, are expected to increase at 5 percent inflation rate per year after the first year.
The equipment falls into the MACRS five-year class for tax depreciation and is subject to the following depreciation allowances:
Year |
Allowance |
1 |
0.20 |
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 8%.
You can use Excel to complete this problem. If you do, please submit your homework document and the Excel file.
a. Estimate the project’s net cash flows over its five-year estimated life. Hint: complete the following table.
0 |
1 |
2 |
3 |
4 |
5 |
|
Equipment cost |
||||||
Net revenue |
||||||
Less: |
||||||
Labor & Maintenance |
||||||
Utilities costs |
||||||
Supplies |
||||||
Incremental overhead |
||||||
Depreciation |
||||||
Income before taxes |
||||||
Taxes (40%) |
||||||
Project’s net income |
||||||
Plus: Depreciation |
||||||
Plus: Net salvage value |
b. What’s the project’s NPV?
c. What’s the project’s IRR?
A. | ( in $) | ||||||
0 | 1 | 2 | 3 | 4 | 5 | ||
Equipment cost | 600000 | ||||||
Net revenue | 300000 | 315000 | 330750 | 347288 | 364652 | ||
Less: | |||||||
Labor & Maintenance | 100000 | 105000 | 110250 | 115763 | 121551 | ||
Utilities costs | 10000 | 10500 | 11025 | 11576 | 12155 | ||
Supplies | 18750 | 19688 | 20672 | 21705 | 22791 | ||
Incremental overhead | 5000 | 5250 | 5513 | 5788 | 6078 | ||
Depreciation | 120000 | 192000 | 114000 | 72000 | 66000 | ||
Income before taxes | 46250 | -17438 | 69291 | 120455 | 136078 | ||
Taxes (40%) | 18500 | -6975 | 27716 | 48182 | 54431 | ||
Project’s net income | 27750 | -10463 | 41574 | 72273 | 81647 | ||
Plus: Depreciation | 120000 | 192000 | 114000 | 72000 | 66000 | ||
Plus: Net salvage value | 134400 | ||||||
Net Cash Flows (1) | -600000 | 147750 | 181538 | 155574 | 144273 | 282047 | |
B. | Net Present Value | ||||||
Present Value Factor (@ 8%) | 1 | 0.9259 | 0.8573 | 0.7938 | 0.7350 | 0.6806 | |
PV of Net Cash Flows | -600000 | 136806 | 155639 | 123500 | 106045 | 191956 | |
PV of Net Cash inflows | 713946 | ||||||
PV of Cash Out Flows | -600000 | ||||||
Net Present Value of Project | 113946 | ||||||
C. | IRR | ||||||
Since at Cost of Capital of 8%, Net Present Value is $113946, IRR is higher than 8% | |||||||
Calculating NPV Using 12% | |||||||
Present Value Factor (@ 12%) | 1 | 0.8929 | 0.7972 | 0.7118 | 0.6355 | 0.5674 | |
PV of Net Cash Flows | -600000 | 131920 | 144721 | 110735 | 91688 | 160041 | |
NPV AT 12% | 39104 | ||||||
Calculating NPV Using 15% | |||||||
Present Value Factor (@ 15%) | 1 | 0.8696 | 0.7561 | 0.6575 | 0.5718 | 0.4972 | |
PV of Net Cash Flows | -600000 | 128478 | 137268 | 102293 | 82489 | 140227 | |
NPV AT 15% | -9245 | ||||||
IRR = | LOWER RATE + [ NPV AT LOWER RATE/ (NPV AT LOWER RATE - NPV AT HIGHER RATE) ] * (HIGHER RATE - LOWER RATE) | ||||||
= | 0.12 + ( 39104 / (39104-(-9245) )) * (0.15-0.12) | ||||||
= | 14.43% |
Georgia Health Center, a for profit hospital, is evaluating the purchase of a new diagnostic equipment....
14.7 California Health Center, a for-profit hospital, is evaluating the pur- chase 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 debt losses...
PLEASE SHOW ALL WORK AND CALCULATIONS. 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...
10.2 California Imaging Center, a not-for-profit business, is evaluating the purchase of new diagnostic equipment. The equipment which costs $600,000, has an expected life of five years and an estimated 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 cach year of the project's life. On average, cach procedure is projected to generate $80 in cash collections during the first year of use. Thus, net...
lakes pur World Exposition. Alth atto conduct a financial We lealthcare services for next Although flattered by the request, the clinic's managers cial analysis of the project. An up-front cost of $160,000 is pic ready. Then, a net cash inflow of $1 million is expected from he two years of the exposition. However, the clinic has to pay position a fee for the marketing value of the opportunity. be paid at the end of the second year, is $2 million....
Graziano Corporation (GC) is considering a project to purchase new equipment. The equipment would be depreciated by the straight-line method over its 3-year life and would have a zero-salvage value. The project requires an investment of $6,000 today on net working capital. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other company’s products and would reduce its pre-tax annual cash flows of $5,000 per year. The investment...
Graziano Corporation (GC) is considering a project to purchase new equipment. The equipment would be depreciated by the straight-line method over its 3-year life and would have a zero-salvage value. The project requires an investment of $6,000 today on net working capital. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other company’s products and would reduce its pre-tax annual cash flows of $5,000 per year. The investment...
Calexico Hospital plans to invest in a new MRI machine. The cost of the MRI is $1.8 million. The MRI has an economic life of 5 years, and it will be depreciated over a five-year life to a $400,000 salvage value. Additional revenues attributed to the new MRI will be in the amount of $1.5 million per year for 5 years. Additional operating expenses, excluding depreciation expense, will amount to $1 million per year for 5 years. Over the life...
Your company is considering a new project. The project requires to purchase an equipment of $100,000. The equipment will be depreciated over the five years period with straight-line depreciation. Revenues and other operating costs are expected to be constant over the project's 10-year expected operating life. The expected revenue is $50,000 per year, and the operating cost (excluding depreciation) is $25,000. The tax rate is 30%. What is the expected cash flow in year 5? (C) $3,500 $17,500 $23,500 $25,000...
13. A company is considering purchasing a machine that costs $344000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100000 and annual operating expenses exclusive of depreciation expense are expected to be $38000. The straight-line method of depreciation would be used. If the machine is purchased, the annual rate of return expected on this machine is 36.04%. 11.05%. 5.52%. 18.02%. 14....
Takhini Hot Springs Company has an old machine that is fully depreciated but has a current salvage value of $5,000. The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value. Expected changes in annual revenues and expenses if the new machine is purchased are: $63,000 Increased revenues Increased expenses: $20,000 9,000 12,000 Salary of additional operator Supplies Depreciation 45,000 $18,000 4,000 Maintenance Increased net income Required 1) What...