14.7 California Health Center, a for-profit hospital, is evaluating the pur- chase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project's life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses and contractual allowances, in its first year of use. Thus, net revenues for Year 1 are estimated at 15 x 250 x $80 - $300,000. Labor and maintenance costs are expected to be $100,000 during the first year of operation, while utilities will cost another $10,000 and cash overhead will increase by $5,000 in Year 1. The Chapter 14: The Basics of Capital Budget 527 cost for expendah uring the first year. All costs and revenues pendable supplies expected to a spe Gest wear. Al costs and crept depreciation, are increasca a 5 percent of the equipment fails to the MACRS feed and is subject to the following depois expected to ind preciation and Year Allomance 0.20 0.32 0.19 0.12 0.11 0.06 1:00 The hospital's tax rate is 40 percent, and its corporate cost of capital is 10 percent Estimate the project's net cash flow over its five year estimated life. (Hint: Use the following format as a guide. Equipment Net revues Le Lab /maintenance costs Utilities costs Supplies Incremental overhead Depreciation Operating income Taxes Net operating income Plus: Depreciation Plus Equipment age value Net cash flow b. What are the project's NPV and IRR (Assume for now that the project has average risk.) het hy the president and CEO of Kidd Pharma lieling