California health Center, a not for profit hospital, is evaluating the purchase of new diagnostic equipment. the equipment, which costs $600,000, has an expected life of five years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be used 15 times per day for 250 days a year for each year of the project's life. on average, each procedure is expected to generate $80 in collections, which is net of bad debt losses and contractual allowances, in its first year of use. Thus, net revenues for Year 1 are estimated at 15 x 250 x $80 = $300,000. Labor and maintenance costs are expected to be $100,000 during the first year of operation, while utilities will cost another $10,000 and cash overhead will increase by $5,000 in year 1. The cost for expandable supplies is expected to average $5 per procedure during the first year. All costs and revenues, except depreciation, are expected to increase at a 5% inflation rate after the first year. The equipment falls into the MACRS five year class for tax depreciation and is subject to the following depreciation allowances:

Year Allowance

1 0.20

2 0.32

3 0.19

4 0.12

5 0.11

6 0.06

_______

1.00

The hospital tax rate is 40% and its corporate cost of capital is 10%.

a. Estimate the project's net cash flows over its 5 year estimate life.

b. What are the project's NPV and IRR? ( assume project has average risk)

Year

0 1 2 3 4 5

Equipment Cost

Net Revenues

Less: Labor/maintenance cost

Utilities

Supplies

Incremental Overhead

Depreciation

Operating Income

Taxes

Net Operating Income

Plus: Depreciation

Plus: Equipment Salvage Value

Net Cash Flow