Tin Man Memorial Hospital, a non-taxpaying entity, is starting a new heart center. The expected patient volume demands will generate $8,000,000 per year in revenues for the next five years. The expected operating expenses, excluding depreciation, will increase expenses by $3,000,000 per year for the next five years. The initial cost of building and equipment is $16,000,000. Straight-line depreciation is used to estimate depreciation expense and the building and equipment will be depreciated over a five-year life to their salvage value. The expected salvage value of the building and equipment at year five is $1,000,000.

The cost of capital for this project is 8 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 40 percent. (Hint: see Appendix E. Since the hospital is depreciating to the salvage value, there is no tax effect on the sale of the asset.)