Question
Allegheny Community Hospital is a nonprofit hospital operated by the county. The hospitals administrator is considering a proposal to open a new outpatient clinic in
Allegheny Community Hospital is a nonprofit hospital operated by the county. The hospitals administrator is considering a proposal to open a new outpatient clinic in the nearby city of New Castle. The administrator has made the following estimates pertinent to the proposal.
Construction of the clinic building will cost $780,000 in two equal installments of $390,000, to be paid at the end of 20x0 and 20x1. The clinic will open on January 2, 20x2. All staffing and operating costs begin in 20x2.
Equipment for the clinic will cost $150,000, to be paid in December of 20x1.
Staffing of the clinic will cost $800,000 per year.
Other operating costs at the clinic will be $200,000 per year
. Opening the clinic is expected to increase charitable contributions to the hospital by $250,000 per year.
The clinic is expected to reduce costs at Allegheny Community Hospital. Annual cost savings at the hospital are projected to be $1,000,000.
A major refurbishment of the clinic is expected to be necessary toward the end of 20x5. This work will cost $180,000.
Due to shifting medical needs in the county, the administrator doubts the clinic will be needed after 20x9.
The clinic building and equipment could be sold for $290,000 at the end of 20x9.
The hospitals hurdle rate is 12 percent.
Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)
Required: 1-3. Fill in the following table to compute the net present value of the proposed outpatient clinic
. 4. Should the administrator recommend to the hospital's trustees that the clinic be built?
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