Reference no: EM132953039
California Health Center, a 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 pre-tax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a 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 it first year of use.
Thus net revenues for Year 1 are estimated at 15x250x$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 expendable 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 hence is subject to the following depreciation allowances:
Year Allowance
1 0.2
2 0.32
3 0.19
4 0.12
5 0.11
6 0.06
The hospital's tax rate is 40%, and its corporate cost of capital is 10%. Assume that the project has average risk.
What is the project's NPV?
Format is $xx,xxx
What is the project's IRR?
Format is xx.x%
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