Question

Calexico Hospital plans to invest in a new MRI. The cost of the MRI is $1,800,000. the machine has an economic life of five years, and it will be depreciated over a five-year life to $200,000 salvage value. additional revenues attributed to the new machine will amount to 1,500,000 per year for five years. additional operating costs, excluding depreciation expense will amount to $1,000,000 per year for five years. over the life of the machine, net working capital will increase by $30,000 per year for five years.

a) assuming that hospital is a non taxpaying entity, what is the project's NPV at a discount rate of 8 percent, and what is the project's IRR? is the decision to accept or reject the same under either capital budgeting method or does it differ?

b) assuming that this hospital is a taxpaying entity and its tax rate is 30 percent, what is the project's NPV at a cost of capital of 8 percent and what is the project's IRR? is the decision to accept or reject the same under either capital budgeting method or does it differ?

Answer 1

solution;

fic =IRR(L2:17) А B Costs Depreciation PBT Tax@0% PAT 1 Year Revenue 0 1 $1,500,000 4 2 $1,500,000 3 $1,500,000 6 4 $1,500,000 7 5 $1,500,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ $ $ $ $ 320,000 320,000 320,000 320,000 320,000 $180,000 $ 180,000 $180,000 $180,000 $180,000 $ $ $ $ $ - - - - - $ 180,000 $ 180,000 $180,000 $ 180,000 $ 180,000 Depreciation Cash flows from operations Working capital Investment Total cash flows | $ (30,000.00) $(1,800,000) $ (1,830,000)|| $ 320,000 $ 468,569 $ (30,000.00) $ 438,569 $ 320,000 $ 468,569 $ (30,000.00) $ 438,569 $ 320,000 $ 468,569 $ (30,000.00)| $ 438,569 $ 320,000 $ 468,569 $ (30,000.00) $ 438,569 $ 320,000 $ 468,569 $ 150,000.00 $ 200,000 $ 818,569 8 IRR = 11.32% 10 Costs Depreciation PBT Tax@30% PAT 12 11 Year Revenue 0 13 11 $1,500,000 14 21 $1,500,000 15 3 $1,500,000 16 4 $1,500,000 5 $1,500,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ $ $ $ $ 320,000 320,000 320,000 320,000 320,000 $ 180,000 $180,000 $ 180,000 $ 180,000 $ 180,000 $ 54,000 $ 54,000 $ 54,000 $ 54,000 $ 54,000 $126,000 $126,000 $126,000 $126,000 $126,000 Depreciation Cash flows from operations Working capital Investment Total cash flows $ (30,000.00) $(1,800,000) $ (1,830,000) $ 320,000 $ 414,569 $ (30,000.00) $ 384,569 $ 320,000 $ 414,569 $ (30,000.00) 384,569 $ 320,000 $ 414,569 $ (30,000.00) $ 384,569 $ 320,000 $ 414,569 $ (30,000.00) $ 384,569 $ 320,000 $ 414,569 $ 150,000.00 $ 200,000 $ 764,569 IRR = 7.33%