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 its first year of use. Thus, net revenues for Year 1 are estimated at 15 X 250 X $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

..........................................................1

The hospital's tax rate is 40%, and its corporate cost of capital is 10%.

a. Estimate the project's net cash flows over its five-year estimated life.

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