10. Evaluate the following capital investment proposal using the

spreadsheet in the Skill Building Module as a template.

The Project to Evaluate for Problem 10:

An Ambulatory Surgery Center (ASC) has been presented with a proposal to

offer a new laparoscopic procedure that would require the purchase of a

specialized piece of equipment. This piece of equipment offers physicians the

opportunity to do multiple types of procedures. You've been asked by the ASC's

administrator to use the techniques of preparing a discounted cash flow analysis

to evaluate it from an economic point of view by computing the Net Present

Value and Internal Rate of Return.

Assumptions:

For your analysis assume that the ASC uses a 8% discount rate for projects of

this risk level, and that they will use a five-year time horizon. This is a taxexempt not-for-profit organization so there will not be any income tax effects to

consider in the calculations.

After buying the equipment the center is expected to generate gross revenues

of $85,000 each year in the first two years and it is expected to increase to

$115,000 each year in the next three years. The services will be paid for by third

parties and there is a demand for this new service. Deductions from revenue are

expected to average 25% of gross revenues in each of the five years. The initial

equipment cost is $160,000 and will cost $32,000 to install. After five years the

equipment will be retired, and it is expected that it could be sold for $28,000.

The costs for the service include part-time staffing costs of $11,500 and supply

costs of $7,800 in each of the first two years. For the last three years, salaries

are expected to be $14,000 and supplies are estimated to be $12,400 in each of

those last three years. The equipment is under warranty in the first year so

there is no extra fee paid. A maintenance contract costing $9,000 per year will

be paid in years 2 through 5.

Required:

1. Set up the excel spreadsheet by inputting the above assumptions in the

appropriate cells.

2. Summarize your answer in the following table and note whether this is an

attractive project from a purely financial point of view.

Summarize your answer in the following table:

Description Your Answer

Net Present Value of Cash Flows:

Internal Rate of Return:

Is this an attractive project from a purely financial point of

view based upon the numbers that you calculated above?

Why did you make that decision?