eraluatine is evaluating the equipment, which on 14.7 California Health Center,

Question

eraluatine is evaluating the equipment, which on 14.7 California Health Center, a for-profit hospital, is chase of new diagnostic equipment. The equipment. $600,000, has an expected life of five years and an estiman salvage value of $200,000 at that time. The equipment s to be used 15 times a day for 250 days a year for cach yeacs project's life. On average, each procedure is expected to $80 in collections, which is net of bad debt losses and contrac allowances, in its first year of use. Thus, net revenues for Yer l estimated at 15 × 250 × $80-$300,000 year of Labor and maintenance costs are expected to be $I during the first year of operation, while utilities will cost $10,000 and cash overhead will increase by $5,000 in Ye

Explanation / Answer

Solution:

a) Estimating the Project's Net Cash Flows over its Five Year Estimated Life:

Year 0 1 2 3 4 5 Equipment cost ($600,000.00) Net revenues $300,000.00 $315,000.00 $330,750.00 $347,287.50 $364,651.88 Less: Labor/maintenance costs ($100,000.00) ($105,000.00) ($110,250.00) ($115,762.50) ($121,550.63) Utilities costs ($10,000.00) ($10,500.00) ($11,025.00) ($11,576.25) ($12,155.06) Supplies ($18,750.00) ($19,687.50) ($20,671.88) ($21,705.47) ($22,790.74) Incremental overhead ($5,000.00) ($5,250.00) ($5,512.50) ($5,788.13) ($6,077.53) Depreciation ($120,000.00) ($192,000.00) ($114,000.00) ($72,000.00) ($66,000.00) Operating income $46,250.00 ($17,437.50) $69,290.63 $120,455.16 $136,077.91 Taxes $18,500.00 ($6,975.00) $27,716.25 $48,182.06 $54,431.17 Net operating income $27,750.00 ($10,462.50) $41,574.38 $72,273.09 $81,646.75 Plus: Depreciation $120,000.00 $192,000.00 $114,000.00 $72,000.00 $66,000.00 Plus: After-tax equipment salvage value* $134,400.00 Net cash flow ($600,000.00) $147,750.00 $181,537.50 $155,574.38 $144,273.09 $282,046.75

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