Chapter $11--$ Capital Budgeting

ssigned Problem $3$

California Health Center, a for$-$profit hospital, is evaluating the purchase of new diagnostic quipment. The equipment, which costs $\backslash (\backslash$$ $600,000\backslash ),$ has an expected life of five years and an estimated retax salvage value of $\backslash (\backslash$$ $200,000\backslash )$ at that time. The equipment is expected to be used $15$ times a day or $\backslash (\backslash$mathbf$\{250\}\backslash )$ days a year for each year of the project's life. On average, each procedure is expected to enerate $\backslash (\backslash$$ $80\backslash )$ in collections, which is net of bad debt losses and contractual allowances, in its first ear of use. Thus, net revenues for Year $1$ are estimated at $\backslash (15\backslash$times $250\backslash$times $\backslash$$ $80=\backslash$$ $300,000\backslash ).$

abor and maintenance costs are expected to be $\backslash (\backslash$$ $100,000\backslash )$ during the first year of operation, while tilities will cost another $\backslash (\backslash$$ $10,000\backslash )$ and cash overhead will increase by $\backslash (\backslash$$ $5,000\backslash )$ in Year $1.$ The cost for xpendable supplies is expected to average $\backslash (\backslash$$ $5\backslash )$ per procedure during the first year. All costs and evenues, except depreciation, are expected to increase at a $5$ percent inflation rate after the first year.

The equipment falls into the MACRS five$-$year class for tax depreciation and hence is subject to the ollowing depreciation allowances:

The hospital's tax rate is $\backslash (\backslash$mathbf$\{40\}\backslash )$ percent and its corporate cost of capital is $\backslash (\backslash$mathbf$\{10\}\backslash )$ percent.

$.$ Estimate the project's net cash flows over its five$-$year estimated life.

$.$ What are the project's NPV and IRR? $($Assume that the project has average risk.$)$