California health Center, a not 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 per 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 and cash overhead will increase by $5,000 in year 1. The cost for expandable 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% 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 0.20
2 0.32
3 0.19
4 0.12
5 0.11
6 0.06
_______
1.00
The hospital tax rate is 40% and its corporate cost of capital is 10%.
a. Estimate the project's net cash flows over its 5 year estimate life.
b. What are the project's NPV and IRR? ( assume project has average risk)
Year
0 1 2 3 4 5
Equipment Cost
Net Revenues
Less: Labor/maintenance cost
Utilities
Supplies
Incremental Overhead
Depreciation
Operating Income
Taxes
Net Operating Income
Plus: Depreciation
Plus: Equipment Salvage Value
Net Cash Flow
California health Center, a not 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 per 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 and cash overhead will increase by $5,000 in year 1. The cost for expandable 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% 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 0.20
2 0.32
3 0.19
4 0.12
5 0.11
6 0.06
_______
1.00
The hospital tax rate is 40% and its corporate cost of capital is 10%.
a. Estimate the project's net cash flows over its 5 year estimate life.
b. What are the project's NPV and IRR? ( assume project has average risk)
Year
0 1 2 3 4 5
Equipment Cost
Net Revenues
Less: Labor/maintenance cost
Utilities
Supplies
Incremental Overhead
Depreciation
Operating Income
Taxes
Net Operating Income
Plus: Depreciation
Plus: Equipment Salvage Value
Net Cash Flow
Related questions
The Board of Trustees has decided that we should attempt to expand our service offering. They want you to evaluate the information below and determine if this is a project we should move forward with.
The MRI Trailer costs $600,000 and has an expected life of 5 years with an estimated salvage value of $200,000 at that time. After some extensive research, the numbers we have come up with look like this:
- 15 tests per day for 250 days per year for each year of the projects life
- Each procedure is expected to generate $80 in cash collections during the first year of use (Net revenue for year 1 is 15*250*80=$300,000)
- Labor and Maintenance costs are expected to be $100,000 during the first year
- Utilities will cost $10,000 in year one and there is an incremental overhead increase of $5,000 beginning in year one
- Cost for expendable supplies is expected to be $5 per procedure
- Costs and revenues are expected to increase at a 5% inflation rate
- Our corporate cost of capital is 10%
In the Excel spreadsheet template:
- estimate the project's net cash flow over the 5 year estimated life. I want you to use the properties (formulas) in Excel here.
- determine the project's NPV and IRR (Use the excel formulas to determine this as well)
- Is this a project we should move forward with? (Consider NPV and strategic value here)---This can be written in text into your excel sheet.
This is how is should be set up on the excel sheet:
| MRI Trailer Purchase | Year | |||||
| 0 | 1 | 2 | 3 | 4 | 5 | |
| Equipment Cost | ||||||
| Net Revenues | ||||||
| Less: Labor/Maintenance Costs | ||||||
| Utilities Costs | ||||||
| Supplies | ||||||
| Incremental Overhead | ||||||
| Operating Income | ||||||
| Equipment Salvage Value | ||||||
| Net Cash Flow | ||||||
| Net Present Value (NPV) | ||||||
| Internal Rate of Return (IRR) | ||||||
