Can you show work/formulas

5 Assigned Problem 3 6 California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic 7 equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated 8 pretax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day 9 for 250 days a year for each year of the project's life. On average, each procedure is expected to 10 generate $80 in collections, which is net of bad debt losses and contractual allowances, in its first 11 year of use. Thus, net revenues for Year 1 are estimated at 15 x 250 x $80 = $300,000. 12 13 Labor and maintenance costs are expected to be $100,000 during the first year of operation, while 14 utilities will cost another $10,000 and cash overhead will increase by $5,000 in Year 1. The cost for 15 expendable supplies is expected to average $5 per procedure during the first year. All costs and 16 revenues, except depreciation, are expected to increase at a 5 percent inflation rate after the first year. 17 18 The equipment falls into the MACRS five-year class for tax depreciation and hence is subject to the 19 following depreciation allowances: 20 Year 21 Allowance 0.32 0.19 22 2 3 1 0.2 4 0.12 5 0.11 6 0.06 23 The hospital's tax rate is 40 percent and its corporate cost of capital is 10 percent. 24 a. Estimate the project's net cash flows over its five-year estimated life. 25 b. What are the project's NPV and IRR? (Assume that the project has average risk.) 26 27 ANSWER 28 Data 29 Procedures per day 30 Days per year 31 Equipment cost 32 Pretax equipment salvage value 33 Net revenues 34 Labor/maintenance costs 35 Utilities costs 36 Supplies per procedure 37 Incremental overhead 38 Tax rate 39 Inflation rate 40ccc 42 a. 1 2 3 4 43 Annual project's cash outflows and inflows 44 45 Equipment cost 46 Net revenues 47 Labor and maintenance costs 48 Utilities costs 49 Supplies 50 Incremental overhead 51 Depreciation 52 Operating income 53 Taxes 54 Net operating income 55 Depreciation 56 Pretax equipment salvage value 57 MACRS equipment salvage value 58 Difference 59 Taxes on the Difference) 60 After-tax equipment salvage value 61 Net cash flow 62 63 b. 64 65 NPV 66 IRR 67 =B32 =B32-157 =154+155+160