## [solved] CHAPTER 11 UHFM 7TH EDITION Chapter 11 -- Capital Budgeting P

CHAPTER 11 UHFM 7TH EDITION

 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 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.) (Hint: Use the following format as a guide.) Year 0 1 2 3 4 5 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

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