Business Assignment 3 ACC 122 Fall, 2019 Name The purpose Business Assignment 3 is to evaluate a capital investment decision. The format is similar to the Comprehensive Problem on page 501 of our text. Please note that other than the construction cost, the numbers are estimates. Assume University of Michigan Hospital (UMH) is evaluating whether it should invest $920,000,000 in a new hospital building. The project would increase cash flows from operations for 5 years. The investment will have no salvage value. UMH uses an 8% hurdle rate. Other information is given below and numbers are in thousands. Year 1 Year 2 Year 3 Year 4 Year 5 | Cash inflow from operations (pre- $ 260,000 $ 270,000 $ 290,000 $ 280,000 $ 280,000 tax) Depreciation on tax return 250,000 210,000 190,000 150,000 120,000 Depreciation on financial 184,000 184,000 184,000 184,000 184.000 statements Net income from investment 64,000 74,000 94,000 84,000 84,000 PV Factor using 8% Requirement 1: Input the PV Factors in the above schedule using 8% for years 1-5. These factors must be obtained from the present value tables in the text on page A-8. (5 points). Requirement 2: Compute the annual net after-tax cash inflows. We will use the alternative computations described on page 502 where we subtract the cash income tax payments from the cash inflows from operations. To start, we need to compute the annual cash income tax payments which are 21% of the cash inflow from operations less the tax return depreciation. Year 1 is done for you. Complete this schedule (5 points) Year 1 Year 2 Year 3 Year 4 Year 5 Cash inflow from operations $260,000 (pre-tax) Depreciation on tax return (250,000) Taxable income 10,000 Tax rate 21% Cash payment for income $ 2,100 taxes Make sure to show dollar signs on the first and last number of each column and format your numbers with commas and underlines on all schedules. Now that we know the cash payment for income taxes, we can compute the after-tax cash flows. Complete the schedule below (5 points) Year 1 Year 2 Year 3 Year 4 Year 5 Cash inflow from operations Cash payment for income taxes After-tax cash flows Requirement 3: Compute the net present value and indicate whether it is positive or negative (round amounts to nearest dollar). Complete the schedule below. (10 points). Year Annual net after-tax cash inflows PV Factor Present Value Total present value Investment required Net positive present value Requirement 4: Compute the cash payback period. Complete the following schedule. (3 points) Year Annual net after-tax cash inflows Cumulative Cash Payback 5 From this schedule, what is the payback period for this project? Show computations here: Requirement 5: Compute the average rate of return by completing the schedule below. (5 points) Annual net income from investment Year Amount Total Average annual net income from investments Average investment Average rate of return Requirement 6: Based upon your results for Requirements 3, 4 and 5, would you recommend UMH make this $920,000,000 investment? Explain using at least 2 complete sentences. (5 points) Requirement 7: There are two articles available about this project that are attached: One is from mlive and the other from Healthcare Design Magazine. Read these articles and then answer the following questions using complete sentences and adding lines as needed. (12 points) A. How long did UM take to assess whether to commit to building the $920M facility? B. How much money in total did UM spend assessing this project? C. Where is the money coming from to pay for this project? D. The project will house how many hospital beds? E. All of the new rooms will be private rooms. What else is unique about the rooms being added? F. When is the project supposed to be completed? This is the end of Business Assignment 3. Save the file using BA3 and your last name (BA3 Davies). Make sure your name is typed at the top of the assignment in the space provided. Business Assignment 3 ACC 122 Fall, 2019 Name The purpose Business Assignment 3 is to evaluate a capital investment decision. The format is similar to the Comprehensive Problem on page 501 of our text. Please note that other than the construction cost, the numbers are estimates. Assume University of Michigan Hospital (UMH) is evaluating whether it should invest $920,000,000 in a new hospital building. The project would increase cash flows from operations for 5 years. The investment will have no salvage value. UMH uses an 8% hurdle rate. Other information is given below and numbers are in thousands. Year 1 Year 2 Year 3 Year 4 Year 5 | Cash inflow from operations (pre- $ 260,000 $ 270,000 $ 290,000 $ 280,000 $ 280,000 tax) Depreciation on tax return 250,000 210,000 190,000 150,000 120,000 Depreciation on financial 184,000 184,000 184,000 184,000 184.000 statements Net income from investment 64,000 74,000 94,000 84,000 84,000 PV Factor using 8% Requirement 1: Input the PV Factors in the above schedule using 8% for years 1-5. These factors must be obtained from the present value tables in the text on page A-8. (5 points). Requirement 2: Compute the annual net after-tax cash inflows. We will use the alternative computations described on page 502 where we subtract the cash income tax payments from the cash inflows from operations. To start, we need to compute the annual cash income tax payments which are 21% of the cash inflow from operations less the tax return depreciation. Year 1 is done for you. Complete this schedule (5 points) Year 1 Year 2 Year 3 Year 4 Year 5 Cash inflow from operations $260,000 (pre-tax) Depreciation on tax return (250,000) Taxable income 10,000 Tax rate 21% Cash payment for income $ 2,100 taxes Make sure to show dollar signs on the first and last number of each column and format your numbers with commas and underlines on all schedules. Now that we know the cash payment for income taxes, we can compute the after-tax cash flows. Complete the schedule below (5 points) Year 1 Year 2 Year 3 Year 4 Year 5 Cash inflow from operations Cash payment for income taxes After-tax cash flows Requirement 3: Compute the net present value and indicate whether it is positive or negative (round amounts to nearest dollar). Complete the schedule below. (10 points). Year Annual net after-tax cash inflows PV Factor Present Value Total present value Investment required Net positive present value Requirement 4: Compute the cash payback period. Complete the following schedule. (3 points) Year Annual net after-tax cash inflows Cumulative Cash Payback 5 From this schedule, what is the payback period for this project? Show computations here: Requirement 5: Compute the average rate of return by completing the schedule below. (5 points) Annual net income from investment Year Amount Total Average annual net income from investments Average investment Average rate of return Requirement 6: Based upon your results for Requirements 3, 4 and 5, would you recommend UMH make this $920,000,000 investment? Explain using at least 2 complete sentences. (5 points) Requirement 7: There are two articles available about this project that are attached: One is from mlive and the other from Healthcare Design Magazine. Read these articles and then answer the following questions using complete sentences and adding lines as needed. (12 points) A. How long did UM take to assess whether to commit to building the $920M facility? B. How much money in total did UM spend assessing this project? C. Where is the money coming from to pay for this project? D. The project will house how many hospital beds? E. All of the new rooms will be private rooms. What else is unique about the rooms being added? F. When is the project supposed to be completed? This is the end of Business Assignment 3. Save the file using BA3 and your last name (BA3 Davies). Make sure your name is typed at the top of the assignment in the space provided