California Health Center, a for-profit hospital, is evaluating the purchase of n

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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 5 years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be use 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 ned of bad debt losses and contractual allowances, in its first year of use. Thus, net revenues for year 1 are estimates at 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 1. the cost of expandable supplies is expected to average $5 per procedure during the first year. all costs and revenue, except depreciation, are expected to incresae at 5% inflation rate 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 0.2 2 0.32 3 0.19 4 0.12 5 0.11 6 0.06 1 the hospital's tax rate is 40%, and its corporate cost of capital is 10% A estimate the projects net cash flows over its 5-year estimated life (hint: use the following format as a guide) Year equipment cost 0 1 2 3 4 5 net revenues less: labor/maintenance costs utilities costs supplies incremental overhead depreciation operating income taxes net operating income plus: depreciaiton Plus: equipment salve value net cash flow B what are the projects's NPV and IRR (assume for now that the project has average risk 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 5 years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be use 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 ned of bad debt losses and contractual allowances, in its first year of use. Thus, net revenues for year 1 are estimates at 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 1. the cost of expandable supplies is expected to average $5 per procedure during the first year. all costs and revenue, except depreciation, are expected to incresae at 5% inflation rate 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 0.2 2 0.32 3 0.19 4 0.12 5 0.11 6 0.06 1 the hospital's tax rate is 40%, and its corporate cost of capital is 10% A estimate the projects net cash flows over its 5-year estimated life (hint: use the following format as a guide) Year equipment cost 0 1 2 3 4 5 net revenues less: labor/maintenance costs utilities costs supplies incremental overhead depreciation operating income taxes net operating income plus: depreciaiton Plus: equipment salve value net cash flow B what are the projects's NPV and IRR (assume for now that the project has average risk

Explanation / Answer

Given: Cost of New Equipment = 600000

Life of New Equipment = 5 years

Salvage value = 200000

Year 1

Annual Revenue Year 1 = 15*250*80 = 300000

Cost of Sales = 100000

utilities cost = 10000

Cash Over head 5000

Cost of expandable supplies = $5 per procedure = 15*250*5 = 18750 per year

Tax = 40% Wacc or cost of capital = 10%

Cost and Revenue increase each year at rate of inflation = 5%

Now, Depreciation schedule as per MACR is

From depreciation table we notice that fair value of new equipment at the end of its life in 5 years is 36000 while as given the salvage value is 200000, therefore the incremental value taxable profit

Now Initial Invest value= cost of equipment = 600000

Remainning cash flows shown in prescribed table

A) Net Cashlows Shown in table above

B) IRR =14%

year allowance Depreciation 1 0.2 120000 2 0.32 192000 3 0.19 114000 4 0.12 72000 5 0.11 66000 6 0.06 36000

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