Thanks. 4. Marshall Healthcare System, a not-for-profit hospital, is planning on

Question

Thanks. 4. Marshall Healthcare System, a not-for-profit hospital, is planning on opening a imaging center including MRI, x-ray, ultrasound, and CT-The new center will generate $3 million per year in revenues f expenses, excluding depreciation, or 5 years. Expected operating would increase expenses by $1.2 million per year for the next 5 years. The initial capital investment outlay for the project is $5.5 million, which will be depreciated on a straight line basis to a The salvage value in year 5 is $800,000. The cost of capital for this project is savage value. 12%. Compute the NPV in the IRR to determine the financial feasibility of the project. a.

Explanation / Answer

Computation of Net Present Value:

IRR = 22% ( Using Excel)

Year 0 1 2 3 4 5 Initial investment (5,500,000) Net revenues 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 Cash operating expenses 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 Depreciation expense 940,000 940,000 940,000 940,000 940,000 Operating income 860,000 860,000 860,000 860,000 860,000 Income taxes - - - - - Depreciation expense 940,000 940,000 940,000 940,000 940,000 Net operating cash flows 1,800,000 1,800,000 1,800,000 1,800,000 1,800,000 Salvage value 800,000 Project cash flows 1,800,000 1,800,000 1,800,000 1,800,000 2,600,000 PVIF ( 12%) 1.000 0.893 0.797 0.712 0.636 0.567 Present value of cash flows (5,500,000) 1,607,000 1,434,600 1,281,600 1,144,800 1,474,200 Net Present Value 1,442,200

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