need major help on this one. simplest idea please :).\"create your own Capital P

Question

need major help on this one. simplest idea please :)."create your own Capital Project analysis problem by performing an NPV calculation: For this problem you will first describe a healthcare organization’s investment project scenario of your own choosing, provide all relevant data, calculate and complete an NPV analysis, showing all calculations, and then interpret the result, ultimately advising whether the project should be undertaken or not ie: was the NPV positive or negative etc. Also be especially careful that you use the correct table/table value from which to perform the present value computation."

Explanation / Answer

Taking the example of a Helath Care Organization ABC Corp considering investment in an advanced scanning machine   which is not available in nearby hospitals and will provide increased patient visits . The Cost and benefit data for the   are as follows; amt $ Cost of Machine                    500,000 Incremental revenue per year                    200,000 Useful life of project   5 years Salvage value                              -   Yearly incremental cost of operation                       75,000 Depreciation by SL method Tax rate 40% WACC of the fund invested =10% We can calculate the NPV of the project by the following process; Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment                (500,000) Yearly incremental revenue       200,000           200,000           200,000              200,000           200,000 Yearly incremental cost       (75,000)           (75,000)           (75,000)              (75,000)           (75,000) Depreciation     (100,000)        (100,000)        (100,000)            (100,000)         (100,000) Taxable Income         25,000             25,000             25,000                25,000              25,000 Tax @40%       (10,000)           (10,000)           (10,000)              (10,000)           (10,000) Post Tax Income         15,000             15,000             15,000                15,000              15,000 Add Back depreciation       100,000           100,000           100,000              100,000           100,000 Net Cash flow                (500,000)       115,000           115,000           115,000              115,000           115,000 PV factor @10%                               1            0.909               0.826               0.751                   0.683                0.621 PV of Cash Flows                (500,000)       104,545             95,041             86,401                78,547              71,406 NPV =                  (64,060) As the NPV of the Project is negative, the investment should not be taken up for implementation.

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