PROBLEM '1 California Health Center; a for-prot 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 pre-tax salvage value of $200,000 at that time. The equipment is expected to he 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 $00 in collections, which is net of bad debt losses and contractual allowances, in its rst year of use. Thus, net revenues for Year 1 are estimated at 15 X 250 X 500 = $300,000. Labor and maintenance costs are expected to be $100,000 during the rst year of operation, while utilities will cost another 510,000 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 rst year. All costs and revenues, except depreciation, are expected to increase at a 5 percent ination rate after the rst year. The equipment falls into the MACRS live-year class for tax depreciation and hence is subject to the following depreciation allowances: Year Allowance I 0.5 0.32 0.10 0.12 0.11 0.06 5')\"th The hospital's tax rate is 40 percent, and its corporate cost of capital is 10 percent. a. Estimate the project's net cash ows over its ve-year estimated life. b. What are the project's NPV and 1BR? [Assume that the project has average risk.)