A Cancer Testing Center has been presented with a proposal to offer a new diagnostic procedure that would require the purchase of a specialized piece of equipment.This piece of equipment offers physicians the opportunity to diagnose many types of cancers.You have been asked by the Center's administrator to use the techniques of preparing a discounted cash flow analysis to evaluate it from an economic point of view by computing the Net Present Value and Internal Rate of Return.

Assumptions:

For your analysis assume that the Center uses a 7% discount rate for projects of this risk level, and that they will initially use a five-year time horizon.This is a tax-exempt not-for-profit organization so there will not be any income tax effects to consider in the calculations.

The business after buying the equipment is expected to generate gross revenues of $100,000 each year in the first two years and is expected to be $120,000 each year in the next two years, followed by %140,000 in the fifth year.The services will be paid for by third parties and there is a demand for this new service.Since the third-party payers will pay less than the full charge, assume that deductions from revenue to average 25% of gross revenues in each of the five years.The equipment cost is $200,000 and will cost $15,000 to install.After five years the equipment will be retired, and it is expected that it could be sold for $25,000.

The costs for the service include part-time staffing costs of $15,000 and supply costs of $12,000 in each of the first two years.For the following two years, salaries are expected to be $20,000 and supplies are estimated to be $15,000; and in the last year five, salaries are expected to be $25,000 and supplies are expected to be 18,000.The equipment is under warranty in the first year so there is no extra fee paid.A maintenance contract costing $3,000 per year willbe paid in years 2 through 5.