MHA Medical Center is starting a new lab test center on its third floor. The expected patient volume demands will generate $500,000 per year in revenues for the next five years. The new center will incur operating expenses, excluding depreciation, of $300,000 per year for the next five years. The initial cost of the new equipment is $700,000. Straight-line depreciation is used to estimate depreciation expense, and the equipment will be depreciated over a five-year life to their salvage value. The expected salvage value of the equipment at year five is $80,000. Compute the NPV (at 10 percent cost of capital) and IRR to determine the financial feasibility of this project if this were a tax-paying entity with a tax rate of 30 percent.Use the following tables. * LOOK at Image Givens: Years012345 Initial investment $0$0 Net revenue $0$0$0$0$0 Operating expenses Depreciation expense Salvage value at the end of project year Cost of capital Tax rate Analysis Years012345 Initial investment $0 Net revenue $0$0$0$0$0 Operating expense $0$0$0$0$0 Depreciation expense $0$0 Earnings before taxes $0$0$0$0$0 Tax expense $0$0$0$0$0 Earnings after taxes $0$0$0$0$0 Add Depreciation expense $0$0$0$0$0 Net operating cash flows $0$0$0$0$0 Salvage value $ - Project cash flows $0$0$0$0$0$0 Cost of capital 0%0%0%0%0% Present value interest factors Annual PV of cash flows Sum of PV of cash flows Net present value (NPV) Internal rate of return (IRR) - Use excel formula Givens:Initial investmentNet revenueOperating expensesDepreciation expenseSalvage value at the end of project yearCost of capitalTax rateAnalysisInitial investmentNet revenueOperating expenseDepreciation expenseEarnings before taxesTax expenseEarnings after taxesAdd Depreciation expenseNet operating cash flowsSalvage valueProject cash flowsCost of capitalPresent value interest factorsAnnual PV of cash flowsSum of PV of cash flowsNet present value (NPV)Internal rate of return (IRR)- Use excel formulaYearsYears00$0$01$0$0$0$0$0$0$0$0$00%22$0$0$0SO$0$0$0$0$00%33$088$SO$0$0$0$0$00%44$0$0$0$0$0$0$0$0$0SO$00%$55$0$0$0$0$0$0$0$0$0$0$00%

Internal Rate of Return: It is the rate at which the net present value of an investment becomes…

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Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

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MHA Medical Center is starting a new lab test center on its third floor. The expected patient volume demands will generate $500,000 per year in revenues for the next five years. The new center will incur operating expenses, excluding depreciation, of $300,000 per year for the next five years. The initial cost of the new equipment is $700,000. Straight-line depreciation is used to estimate depreciation expense, and the equipment will be depreciated over a five-year life to their salvage value. The expected salvage value of the equipment at year five is $80,000. Compute the NPV (at 10 percent cost of capital) and IRR to determine the financial feasibility of this project if this were a tax-paying entity with a tax rate of 30 percent.

Use the following tables. * LOOK at Image


Givens:	Years	0	1	2	3	4	5
Initial investment						$0	$0
Net revenue			$0	$0	$0	$0	$0
Operating expenses
Depreciation expense
Salvage value at the end of project year
Cost of capital
Tax rate


Analysis	Years	0	1	2	3	4	5
Initial investment		$0
Net revenue			$0	$0	$0	$0	$0
Operating expense			$0	$0	$0	$0	$0
Depreciation expense					$0	$0
Earnings before taxes		$0	$0	$0	$0	$0
Tax expense			$0	$0	$0	$0	$0
Earnings after taxes			$0	$0	$0	$0	$0
Add Depreciation expense		$0	$0	$0	$0	$0
Net operating cash flows		$0	$0	$0	$0	$0
Salvage value							$ -
Project cash flows		$0	$0	$0	$0	$0	$0
Cost of capital			0%	0%	0%	0%	0%
Present value interest factors
Annual PV of cash flows
Sum of PV of cash flows
Net present value (NPV)

Internal rate of return (IRR) - Use excel formula

Givens:
Initial investment
Net revenue
Operating expenses
Depreciation expense
Salvage value at the end of project year
Cost of capital
Tax rate
Analysis
Initial investment
Net revenue
Operating expense
Depreciation expense
Earnings before taxes
Tax expense
Earnings after taxes
Add Depreciation expense
Net operating cash flows
Salvage value
Project cash flows
Cost of capital
Present value interest factors
Annual PV of cash flows
Sum of PV of cash flows
Net present value (NPV)
Internal rate of return (IRR)- Use excel formula
Years
Years
0
0
$0
$0
1
$0
$0
$0
$0
$0
$0
$0
$0
$0
0%
2
2
$0
$0
$0
SO
$0
$0
$0
$0
$0
0%
3
3
$0
88
$SO
$0
$0
$0
$0
$0
0%
4
4
$0
$0
$0
$0
$0
$0
$0
$0
$0
SO
$0
0%
$
5
5
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
0%

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