Reference no: EM132999300

Oschner Hospital is evaluating purchasing new X-ray equipment. The equipment costs $725,000, has an expected life of 5 years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be used 18 times a day for 275 days a year for each year of the project life. On average, each X-ray is expected to generate $90 in collections, which is net of bad debt losses and contractual allowances, in its first year of use. This, net revenues for Year 1 are estimated at 18 x 275 x $90 = $445,500

Labor costs are expected to be $155,000 during the first year, while utilities cost another $30,000 and cash overhead will increase by $15,000 in Year 1. The cost for supplies is expected to average $5 per procedure during the first year. All costs and revenues, except depreciation, are expected to increase 5% inflation rate after the first year.

The equipment falls into the MACRS 5 year class for tax depreciation and 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 35% and corporate cost of capital 10%

What is the projects NPV

What is the IRR

Based on the results, should this project be approved