Problem 1:

Assume that you are the CFO at Methodist Hospital in San Antonio. The CEO has asked you to analyze two proposed capital investments: Project X and Project Y. Each project requires a net investment outlay of $10,000, and the cost of capital for each project is 12 percent. The project's expected net cash flows are as follows:

Year Project X Project Y

0 -$11,000 -$11,000

1 $7,000 $3,000

2 $3,000 $3,000

3 $3,000 $4,000

4 $1,000 $4,000

a. Calculate each project's payback period, net present value (NPV), and internal rate of return (IRR).

b. Which project (or projects) is financially acceptable? Explain your answer.

a. Complete the table below, solving for the project's cash flows, paybacks, NPVs (at 12 percent), and IRRs.

	Project X	Project X	Project Y	Project Y
	Annual	Cumulative	Annual	Cumulative
Year	Cash Flow	Cash Flow	Cash Flow	Cash Flow
0
1
2
3
4
Payback
NPV
IRR

Problem 2:

HCA is evaluating the bulk purchase of new Hill-Rom hospital beds for its Central & West Texas region. The purchase will cost $36,000,000 and the beds have an expected life of five years. The expected pretax salvage value after five years of use is $4,000,000. In total, the beds are expected to generate $9,000,000 in revenue in the first year of operations.

Maintenance costs are expected to be $200,000 during the first year of operation, while the increase in utilities will cost another $100,000 across the system in Year 1. The cost for additional expendable supplies is expected to average $250,000 during the first year. All costs and revenues,except depreciation, are expected to increase at a 2.8% inflation rate after the first year. The hospital's aggregae tax rate is 21.15%, and its corporate cost of capital is 8.4%.

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

Year	Allowance
1	20%
2	32%
3	19%
4	12%
5	11%
6	6%

a. Complete the table below, solving for the project's net cash flows over its five-year estimated life.

			0	1	2	3	4	5
Equipment cost		-$36,000,000
Net revenues
Less:	Maintenance costs
	Utilities costs
	Supplies
	Depreciation
Operating income
Taxes
Net operating income
Depreciation
Plus: After-tax equipment salvage value*
Net cash flow		-$36,000,000

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

c. Based on the results of the analysis, should this project be approved?