Methodist Hospital is evaluating the purchase of a new MRI system. The system costs $1.5 million, and the hospital would have to spend another $1 million on shipping, site preparation, and installation. The MRI site is estimated to generate weekly usage (volume) of 40 scans, and each scan would, on average, cost the hospital $15 in supplies. The site is expected to operate 50 weeks per year, with the remaining two weeks devoted to maintenance. The estimated average charge per scan is $500, but 25 percent of this amount, on average, is expected to be lost to indigent patients, contractual allowances, and bad-debt losses.

The MRI site would require two technicians, prompting an incremental increase in annual labor costs of $50,000 in the first year, including fringe benefits. Cash overhead costs would increase by $10,000 if the MRI site is activated. The equipment would require maintenance, which would be furnished by the manufacturer for an annual fee of $150,000, payable at the end of each year of operation. For book purposes, the MRI site would be depreciated by the MACRS five-year class for tax depreciation (0.20, 0.32, 0.19, 0.12, 0.11, and 0.06). The hospital has a 40% tax rate.

The MRI site is expected to operate for five years, at which time the hospitals master plan calls for a brand-new imaging facility. The hospital plans to sell the MRI system at that time for an estimated $750,000 salvage value, net of removal costs. The inflation rate is estimated to average 3 percent over the period, and this rate is expected to apply to all revenues and costs except depreciation. The Hospitals managers initially assume that projects under evaluation have average risk; thus, the hospitals 10 percent corporate cost of capital is the appropriate project cost of capital.

1. Estimate the projects net cash flows over its five year estimated life
2. What are the projects payback, NPV, and IRR?

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