Heart Hospital is in possession of a nonoperational, fifty-bed hospital. The after-tax value of the land is $2,500,000. The equipment and the building are fully depreciated and have an after-tax market value of $3,500,000. The hospital could either sell off its property or convert it into a new state-of-the-art acute-care hospital. An analysis of the market reveals that the facility could attract 9,000 discharges per year, a number expected to increase at a rate of 3 percent per year. Projected net patient revenue per discharge is $10,000 for the first year, increasing annually by 4 percent thereafter. Projected operating expense per discharge is $8,400 for the first year, increasing annually by 6 percent thereafter.

Renovation costs to create a plush facility would be $45,000,000. The new facility would be depreciated on a straight-line basis over a ten-year life to a $12,000,000 salvage value.

At the end of ten years, the land is expected to be sold for an after-tax value of $6,000,000.

Net working capital will increase at a rate of $3,000,000 per year over the life of the project. Heart Hospital has a 35 percent tax rate and a required rate of return of 9 percent.

Use the NPV technique and IRR method to evaluate this project. (Hint: see Appendices C, D, and E.)