A hospital is evaluating the purchase of new equipment. The equipment costs $700,000, an expected life of 5 years, and estimated pretax salvage value of $50,000 at that time. The equipment is expected to be used 18 times a day for 250 days a year for each year of the project's life. On average, each procedure is expected to generate $75 in collections, which is net of bad debt losses and contractual allowances, in its first year of use. Net revenues for Year 1 are estimated at 18 X 250 X $75 = $337,500.

Labor/maintenance costs are $90,000 during the first year of operation, while utilities will cost another $15,000 and cash overhead will increase by $5,000 in Year 1. The cost for expendable supplies is expected to average $7 per procedure during the first year. All costs and revenues, except depreciation, are expected to increase at a 5 percent inflation rate after the first year.

The equipment falls into the MACRS five-year class for tax depreciation and hence is subject to the following depreciation allowances:

Hospital's tax rate is 20%, and its corporate cost of capital is 10%

What is the project's after-tax equipment salvage value?

What is the project's net cash flow at date 0?

what is the project's net cash flow at date 1? date 2? date 3? date 4? date 5?

What is the NPV?

What is the IRR?

Year Allowance 1 0.20 2 0.32 3 0.19 4. 0.12 5 0.11 6 0.06 Year Allowance 1 0.20 2 0.32 3 0.19 4. 0.12 5 0.11 6 0.06