Question 12

HCA is evaluating the bulk purchase of new Hill-Rom hospital beds for its Central & West Texas region.
The purchase will cost $35,000,000 and the beds have an expected life of five years.
The expected pretax salvage value after five years of use is $3,500,000.
In total, the beds are expected to generate $8,000,000 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 acoss 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 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%
The hospital's aggregae tax rate is 21.15%, and its corporate cost of capital is 8.4%.
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?