3. Calexico Hospital plans to invest $1.8 million in a new MRI machine. The MRI will be depreciated over its 5-year economic life to a $200,000 salvage value. Additional revenues attributed to the new MRI will be in the amount of $1.5 million per year for 5 years. Additional operating expenses, excluding depreciation expense, will amount to $1 million per year for 5 years. Over the life of the machine, net working capital will increase by $30,000 per year for 5 years.

A. Assuming that the hospital is a non-profit entity, what is the projects net present value (NPV) at a discount rate of 8%, and what is the projects IRR?

B. Assuming that the hospital is a for-profit entity and the tax rate is 30%, what is the projects NPV at a cost of capital of 8%, and what is the projects IRR?

4. Marshall Healthcare System, a not-for-profit hospital, is planning on opening an imaging center including MRI, x-ray, ultrasound, and CT. The new center will generate $3 million per year in revenues for 5 years. Expected operating expenses, excluding depreciation, would increase expenses by $1.2 million per year for the next 5 years. The initial capital investment outlay for the project is $5.5 million, which will be depreciated on a straight line basis to a savage value. The salvage value in year 5 is $800,000. The cost of capital for this project is 12%.

A. Compute the NPV in the IRR to determine the financial feasibility of the project.

5. Penn Medical Center, a for-profit hospital, is considering the purchase of a new 64-slice CT scanner. The cost of the new scanner is $4 million and will be depreciated over 10 years on a straight line basis to $0 savage value. The tax rate is 40%. The financing options include either borrowing the full cost of the scanner or leasing a scanner. The lease option is a 5-year lease with equal before-tax lease payments of $950,000 per year. The borrowing alternative is a 5-year loan covering the entire cost of the scanner at an interest rate of 5%. The after-tax cost of debt is 3%. Should Penn Medical lease the equipment or borrow the money?