Reference no: EM133205758
Swedish Medical Center, an HCA owned for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $850,000, has an expected life of five years and an estimated pretax salvage value of $350,000 at that time. The equipment is expected to be used 15 times a day for 360 days a year for each year of the project's life. On average, each procedure is expected to generate $125 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 15 X 360 X $125 = $675,000.
Labor and maintenance costs are expected to be $270,000 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 $35 per procedure during the first year. All costs and revenues, except depreciation, are expected to increase at a 3 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
|
|
1
|
0.2
|
|
2
|
0.32
|
|
3
|
0.19
|
|
4
|
0.12
|
|
5
|
0.11
|
|
6
|
0.06
|
The hospital's aggregate tax rate is 28 percent, and its corporate cost of capital is 10 percent.
- What is the project's NPV? Format is $xxx,xxx or ($xxx,xxx)
- What is the project's IRR? Format is xx.xx%
- Based on the results of the analysis, should this project be approved? Format is Yes or No