Please see attached file. Problem 7.

California Health Center, a 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 a 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 expendable

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 percent inflation rate after the first year.

The equipment falls into the MACRS five-year class for tax depreciation and hence is subject to the

following depreciation allowances:

Year	Allowance
1	0.2
2	0.32
3	0.19
4	0.12
5	0.11
6	0.06

The hospital's tax rate is 40 percent, and its corporate cost of capital is 10 percent.

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.)

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 11 -- Capital Budgeting PROBLEM 7 California Health Center, a 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 a 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 expendable 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 percent inflation rate after the first year. The equipment falls into the MACRS five-year class for tax depreciation and hence is subject to the following depreciation allowances: Year 1 2 3 4 5 6 Allowance 0.2 0.32 0.19 0.12 0.11 0.06 The hospital's tax rate is 40 percent, and its corporate cost of capital is 10 percent. 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.) (Hint: Use the following format as a guide.) Year 0 Equipment cost Net revenues Less: Labor/maintenance costs Utilities costs Supplies Incremental overhead Depreciation Operating income Taxes Net operating income Plus: Depreciation Plus: After-tax equipment salvage value* Net cash flow * Pretax equipment salvage value MACRS equipment salvage value Difference Taxes After-tax equipment salvage value 1 2 3 4 5