Marshall Healthcare System, a nontaxpaying entity, is planning to purchase imaging equipment, including an MRI and ultrasonogram equipment, for its new imaging center.

The equipment will generate $3,000,000 per year in revenues for the next five years.

The expected operating expenses, excluding depreciation, will increase expenses by

$1,200,000 per year for the next five years. The initial capital investment outlay for the imaging equipment is $5,500,000, which will be depreciated on a straight-line basis to its salvage value. The salvage value at year five is $800,000. The cost of capital for this project is 12 percent.

a. Compute the NPV and IRR to determine the financial feasibility of this project.

b. Compute the NPV and IRR to determine the financial feasibility of this project if this were a taxpaying entity with a tax rate of 40 percent. (Hint: see Appendix E. Because the organization is depreciating to the salvage value, there is no tax effect on the sale of the asset.)