HCA is evaluating the bulk purchase of new Hill-Rom hospital beds for its Central & West Texas region. The purchase will cost $36,000,000 and the beds have an expected life of five years. The expected pretax salvage value after five years of use is $4,000,000. In total, the beds are expected to generate $9,000,000 in revenue in the first year of operations. Maintenance costs are expected to be $200,000 during the first year of operation, while the increase in utilities will cost another $100,000 across the system in Year 1. The cost for additional expendable supplies is expected to average $250,000 during the first year. All costs and revenues, except depreciation, are expected to increase at a 2.8% inflation rate after the first year.
The hospital's aggregate tax rate is 21.15%, and its corporate cost of capital is 8.4%. The equipment falls into the MACRS five-year class for tax depreciation and hence is subject to the following depreciation allowances: Year Allowance 1 20% 2 32% 3 19% 4 12% 5 11% 6 6%.
a. Estimate the project's net cash flows over its five-year estimated life.
b. What are the project's NPV and IRR? (Assume that the project has average risk.)
c. Based on the results of the analysis, should this project be approved?
a. Complete the table below, solving for the project's net cash flows over its five-year estimated life. 0 1 2 3 4 5
Equipment cost -$36,000,000
Net revenues Less: Maintenance costs Utilities costs Supplies Depreciation Operating income Taxes Net operating income Depreciation Plus: After-tax equipment salvage value* Net cash flow -$36,000,000
b. What are the project's NPV and IRR? (Assume that the project has average risk.)
c. Based on the results of the analysis, should this project be approved?