Alliance Care Hospital (ACH) is a private hospital that is currently considering a project in which they would extensively renovate and upgrade equipment over a five-year period. The renovations would cost $80,000,000; this would be spent over the five-year life of the project. The plan includes expenditures of $10,000,000 per year in each of the first two years of the project and revenues equally divided over each of the remaining years of the project. For the purposes of any analysis assume that these cash flows and the associated tax consequences occur at the end of each year. For this project, Alliance Care would have to invest extensively in some special new equipment. The expected investment would be $12,000,000. This equipment would be part of an extensive array of equipment and would be placed in an asset class with a 7-year depreciation schedule. Alliance Care has many assets in this class and the UCC of this class is currently over half a million dollars. At the end of the project Alliance Care expects to be able to dispose of this special equipment by selling it to a public hospital for $4,000,000.

One of ACHs major concerns is that if they accept the project they will be obliged to forego an alternate opportunity, namely, a private-public partnership contract with the state of Florida to create ambulatory centers. This contract would have netted them $4,000,000 per year in net income (before taxes) over the next 3 years. Assume that these cash flows and any tax consequences occur at the end of each year.

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ACH believes that the additional working capital required, because of undertaking the project, will be as follows:

Year 0 $1,000,000

Year 1 $2,500,000

Year 2 $3,000,000

Year 3 $2,000,000

Year 4 $4,500,000

Year 5 $0

Another of ACHs major concerns is that if they reject the potential contract with the state of Florida, it will impugn their reputation as a collaborative partner and that they will lose future business as a result. They estimate that the potential losses will be $3,000,000 per year for each of the next 5 years. (Assume that these losses and any related tax consequences will occur at the end of each year.) After that time (and because of the expected success of the Project) ACH expects that business will return to pre-project levels.

Perform an NPV analysis to determine if ACH should accept or reject the renovation project. The Director of Finance for ACH has determined that the appropriate discount rate for a project of this risk is 14%. An analysis of ACHs tax returns indicates that ACHs average income tax rate is 35%.