Using excel

UCLA buys $275,000 of a particular item (at gross prices) from its major supplier, McKesson, which offers UCLA terms of 1/5, net 15. Currently, the hospital is paying the supplier the full amount due on Day 15, but it is considering taking the discount, paying on Day 5 and replacing the trade credit with a bank loan that has a 8 percent rate. Assume 360 days per year.

a. What is the amount of free trade credit that UCLA obtains from McKesson Health?

b. What is the amount of costly trade credit?

c. What is the approximate annual cost of the costly trade credit?

d. Should UCLA replace its trade credit with the bank loan? Explain your answer.

e. If the bank loan is used, how much of the trade credit should be replaced?

a.
Medical supplies per year (gross)
Discount within 5 days
Medical supplies (net)
Number of days per year
Medical supplies per day (net)
Days of free trade credit
Amount of free trade credit

b.
Days of costly trade credit
Medical supplies per day (net)
Total trade credit
Amount of free trade credit
Amount of costly trade credit

c.
Approximate % cost = Discount percent X 360
100 - Discount percent Days credit received - Discount period
Discount percent
Days credit received
Days of free trade credit
Periodic cost of trade credit
Number of discount periods per year
Approximate % cost

11. Providence Health is evaluating two different linen supply vendors systems for handling facility linen replacement. There are no incremental revenues attached to the projects, so the decision will be made on the basis of the present value of costs. Providence's weighted average cost of capital is 6.25%. Here are the net cash flow estimates in thousands of dollars:

Year	System X	System Y
0	$ (1,800)	$ (3,850)
1	$ (1,000)	$ (500)
2	$ (1,000)	$ (500)
3	$ (1,000)	$ (500)
4	$ (1,000)	$ (500)
5	$ (1,000)	$ (500)

[a] Assume initially that the systems both have average risk. Which one should be chosen?

[b] Assume that System Y is judged to have high risk. The organization accounts for differential risk by adjusting its corporate cost of capital up or down by 2 percentage points. Which system should be chosen?

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 across 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%	$0

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.

a.
Show Projected Cash Flows
				0	1	2	3	4	5
Equipment cost
Net revenues
Less:	Maintenance costs
	Utilities costs
	Supplies
	Depreciation
Operating income
Taxes
Net operating income
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

b. What are the project's NPV and IRR? (Assume that the project has average risk.)

NPV		Compare to "0"
IRR		Compare to WACC

c. Based on the results of the analysis, should this project be approved?