Methodist Stone Oak, an HCA ow

Methodist Stone Oak, an HCA owned for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $750,000, has an expected life of five years and an estimated pretax salvage value of $250,000 at that time. The equipment is expected to be used 12 times a day for 300 days a year for each year of the project’s life. On average, each procedure is expected to generate $125 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 12 X 300 X $125 = $450,000. Labor and maintenance costs are expected to be $200,000 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 $25 per procedure during the first year. All costs and revenues, except depreciation, are expected to increase at a 3 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 aggregate tax rate is 28 percent, and its corporate cost of capital is 10 percent.

What is the project’s NPV? Format is $xx,xxx or ($xx,xxx)

What is the project’s IRR? Format is xx.xx%

Based on the results of the analysis, should this project be approved? Format is Yes or No