Fall City Healthcare System, a non-taxpaying entity, is going to build a satellite ancillary facility. The tests will generate $15,000,000 per year in revenues for the next five years. The expected operating expenses, excluding depreciation, will increase expenses by $8,000,000 per year for the next five years. The initial cost for the building is $25,000,000, which will be depreciated on a straight-line basis to its salvage value. The salvage value at year 5 is $5,000,000. The cost of capital for this project is 9 percent.

a. Compute the net present value and internal rate of return to determine the financial feasibility of this project.

b. Compute the net present value and internal rate of return to determine the financial feasibility of this project if this were a taxpaying entity with a tax rate of 35 percent. (Hint: see Appendix E. Since the organization is depreciating to the salvage value, there is no tax effect on the sale of the asset.)