Reference no: EM132708414

California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $700,000, has an expected life of five years and an estimated pretax salvage value of $50,000 at that time. The equipment is expected to be used 18 times a day for 250 days a year for each year of the project's life. On average, each procedure is expected to generate $75 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 18 X 250 X $75 = $337,500.

• Labor and maintenance costs are expected to be $90,000 during the first year of operation, while utilities will cost another $15,000 and cash overhead will increase by $5,000 in Year 1. The cost for expendable supplies is expected to average $7 per procedure during the first year. All costs and revenues, 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 following depreciation allowances:

Year      Allowance

10.20

20.32

30.19

40.12

50.11

60.06

Problem 1: The hospital's tax rate is 20 percent, and its corporate cost of capital is 10 percent. What is the project's after-tax equipment salvage value?