Question
Briggs-Gridley Memorial Hospital, a non-taxpaying entity, is starting a new inpatient heart center on its third floor. The expected patient volume demands will generate $5,000,000
Briggs-Gridley Memorial Hospital, a non-taxpaying entity, is starting a new inpatient heart center on its third floor. The expected patient volume demands will generate $5,000,000 per year in revenues for the next 5 years. The new center will incur operating expenses, excluding depreciation, of $3,000,000 per year for the next 5 years. The initial cost of building and equipment is $7,000,000. Straight-line depreciation is used to estimate depreciation expense, and the building and equipment will be depreciated over a 5 year life to its salvage value of $800,000. The cost of capital for this project is 10%.
- Compute the NPV to determine the financial feasibility of this project.
- Compute the IRR to determine the financial feasibility of this project.
- Compute the NPV to determine the financial feasibility of this project if Briggs-Gridley was a tax-paying entity with a tax rate of 30%.
- Compute the IRR to determine the financial feasibility of this project if Briggs-Gridley was a tax-paying entity with a tax rate of 30%. (Hint: see Appendix E. Because the organization is depreciating to the salvage value, there is no tax effect on the sale of the asset.)
- Does paying taxes affect the financial feasibility(accept or reject) decision of this project? Answer YES or NO
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