1. A large hospital company purchased a miniature insulin pump system for childr
ID: 2780266 • Letter: 1
Question
1. A large hospital company purchased a miniature insulin pump system for children with diabetes 9 years ago. It was purchased for $1.9 million and generated a net cash flow (before taxes) of $600,000 per year. It was sold today for $200,000, as salvaged equipment.a) Did this 9 year project make its MARR of 25% before taxes? (Ignore depreciation of any kind.)
b) What was the before-tax IRR (i*)?
Try part a) without a spreadsheet.
2. The pump in problem 1 was depreciated according to US tax regulations as a MACRS 7 year property. The tax rate, Te is 36%.
a) Calculate the after-tax present worth of this project at MARR. The project life is still 9 years.
b) What was the after-tax i*?
Assume that any negative taxes can be refunded within the company, so the carry-forward/carry- back procedure should not be used. Show all your work, clearly labeled. Use of a spreadsheet is recommended.
3. If the hospital in problem 1 did not have the $1.9 million needed for the initial purchase of the pump system, a loan would be taken out. Consider the following case: $1 million was paid at Year 0, and the remaining $900,000 is borrowed to make the purchase at Year 0. The loan is paid back in 4 equal annual payments with an interest rate of 8%, compounded continuously.
All salvage and MARR values are the same as given in problem 1. Use carry-forward/carry-back on the taxes if needed.
Calculate the IRR on the after-tax cash flow for this new 9 year project. Does this project make the MARR of 25%? 1. A large hospital company purchased a miniature insulin pump system for children with diabetes 9 years ago. It was purchased for $1.9 million and generated a net cash flow (before taxes) of $600,000 per year. It was sold today for $200,000, as salvaged equipment.
a) Did this 9 year project make its MARR of 25% before taxes? (Ignore depreciation of any kind.)
b) What was the before-tax IRR (i*)?
Try part a) without a spreadsheet.
2. The pump in problem 1 was depreciated according to US tax regulations as a MACRS 7 year property. The tax rate, Te is 36%.
a) Calculate the after-tax present worth of this project at MARR. The project life is still 9 years.
b) What was the after-tax i*?
Assume that any negative taxes can be refunded within the company, so the carry-forward/carry- back procedure should not be used. Show all your work, clearly labeled. Use of a spreadsheet is recommended.
3. If the hospital in problem 1 did not have the $1.9 million needed for the initial purchase of the pump system, a loan would be taken out. Consider the following case: $1 million was paid at Year 0, and the remaining $900,000 is borrowed to make the purchase at Year 0. The loan is paid back in 4 equal annual payments with an interest rate of 8%, compounded continuously.
All salvage and MARR values are the same as given in problem 1. Use carry-forward/carry-back on the taxes if needed.
Calculate the IRR on the after-tax cash flow for this new 9 year project. Does this project make the MARR of 25%? 1. A large hospital company purchased a miniature insulin pump system for children with diabetes 9 years ago. It was purchased for $1.9 million and generated a net cash flow (before taxes) of $600,000 per year. It was sold today for $200,000, as salvaged equipment.
a) Did this 9 year project make its MARR of 25% before taxes? (Ignore depreciation of any kind.)
b) What was the before-tax IRR (i*)?
Try part a) without a spreadsheet.
2. The pump in problem 1 was depreciated according to US tax regulations as a MACRS 7 year property. The tax rate, Te is 36%.
a) Calculate the after-tax present worth of this project at MARR. The project life is still 9 years.
b) What was the after-tax i*?
Assume that any negative taxes can be refunded within the company, so the carry-forward/carry- back procedure should not be used. Show all your work, clearly labeled. Use of a spreadsheet is recommended.
3. If the hospital in problem 1 did not have the $1.9 million needed for the initial purchase of the pump system, a loan would be taken out. Consider the following case: $1 million was paid at Year 0, and the remaining $900,000 is borrowed to make the purchase at Year 0. The loan is paid back in 4 equal annual payments with an interest rate of 8%, compounded continuously.
All salvage and MARR values are the same as given in problem 1. Use carry-forward/carry-back on the taxes if needed.
Calculate the IRR on the after-tax cash flow for this new 9 year project. Does this project make the MARR of 25%?
Explanation / Answer
1) Year 0 1 2 3 4 5 6 7 8 9 CF -1900000 600000 600000 600000 600000 600000 600000 600000 600000 800000 IRR 28.61% It met its MARR = 25% limit 2) Year 0 1 2 3 4 5 6 7 8 9 Investment -1900000 Income 600000 600000 600000 600000 600000 600000 600000 600000 600000 Depreciation rates 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% Depreciation 271510 465310 332310 237310 169670 169480 169670 84740 Salvage 200000 EBIT 328490 134690 267690 362690 430330 430520 430330 515260 800000 Tax @ 36% 118256 48488 96368 130568 154919 154987 154919 185494 288000 PAT 210234 86202 171322 232122 275411 275533 275411 329766 512000 CF -1900000 481744 551512 503632 469432 445081 445013 445081 414506 512000 PV @ 25% -217395 IRR 20.84% 3) Year 0 1 2 3 4 5 6 7 8 9 Investment -1000000 Income 600000 600000 600000 600000 600000 600000 600000 600000 600000 Depreciation rates 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% Depreciation 271510 465310 332310 237310 169670 169480 169670 84740 Salvage 200000 Interest 63000 45000 27000 9000 EBIT 265490 89690 240690 353690 430330 430520 430330 515260 800000 Tax @ 36% 95576 32288 86648 127328 154919 154987 154919 185494 288000 PAT 169914 57402 154042 226362 275411 275533 275411 329766 512000 CF -1000000 216424 297712 261352 463672 445081 445013 445081 414506 512000 PV @ 25% 181510 IRR 30.20% Loan 0 1 2 3 4 Beginning 900000 675000 450000 225000 Ending 900000 675000 450000 225000 0
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