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The not-for-profit clinic Wise Care, is currently sending out all lab tests to an independent center. To generate additional revenue, the clinic is considering the
- The not-for-profit clinic Wise Care, is currently sending out all lab tests to an independent center. To generate additional revenue, the clinic is considering the purchase of new lab equipment, which will allow the services to be performed in-house. The equipment, which costs $250,000, has an expected life of five years and an estimated salvage value of $100,000 at that time. The equipment is expected to be used 12 times a day for 275 days a year for each year of the projects life. On average, each test is expected to generate $45 in cash collections (revenues) during each year of use. Expenses for each year (do not assume an inflation adjustment) include: labor and maintenance costs ($75,000), utilities ($6,000), overhead ($4,000), and supplies of $3 per procedure. Corporate cost of capital is 10%
- What are the cash flows for this project? (7 points)
- What is the projects IRR? What does it tell you? (7 points)
IRR is 12% which indicates that equipment will give return of 12% on investment during life
- Assuming a project cost of capital of 10%, what is the projects NPV? What does it tell you? (7 points)
The NPV is $15,278 which is a positive value and it indicated that project is profitable and should be undertaken.
- What is your final recommendation? (4 points)
The company should buy equipment because the NPV is positive %15,278 and IRR is 12% which is higher than discount rate of 10%.
PLEASE SHOW ALL CALCULATIONS SO I CAN LEARN
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