Dr. Magneto is evaluating whether to open a private MRI clinic in leased office space in a local strip mall. The clinic will run for two years and then close. Before the clinic opens, the offices require $200,000 of renovations. Dr. Magneto will buy $20,000 of computer equipment and one MRI machine. The MRI machine (GE 3.0T Signa Excite HD) costs $2.4M. Assume that the renovations, computer equipment, and MRI are paid for at the beginning of the first year (t=0) and that all three are classified as 15-year property (with depreciation rates of 5% and 9.5% in the first two years). Assume that the MRI machine will be sold for $500,000 at the end of the second year of business at which time the computer equipment will be worthless. The clinic can perform 72 scans per week for 49 operational weeks per year and will charge $600 per scan. The clinic will need two technicians, two receptionists, and one office manager. Wages, salaries, and other payroll costs (i.e., health insurance premiums) will total $275,000 per year. Maintenance, supplies, marketing, and operating costs for the machine are expected to be $200,000 per year. Annual rent is $60,000 payable at the end of each year. Assume that all revenues (and expenses) occur at the end of the year. Revenues and operating expenses are expected to grow at a rate of 2.5%. The tax rate is 40%. What are th

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1hM

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Dr. Magneto is evaluating whether to open a private MRI clinic in leased office space in a local strip mall. The clinic will run for two years and then close. Before the clinic opens, the offices require $200,000 of renovations. Dr. Magneto will buy $20,000 of computer equipment and one MRI machine. The MRI machine (GE 3.0T Signa Excite HD) costs $2.4M. Assume that the renovations, computer equipment, and MRI are paid for at the beginning of the first year (t=0) and that all three are classified as 15-year property (with depreciation rates of 5% and 9.5% in the first two years). Assume that the MRI machine will be sold for $500,000 at the end of the second year of business at which time the computer equipment will be worthless. The clinic can perform 72 scans per week for 49 operational weeks per year and will charge $600 per scan. The clinic will need two technicians, two receptionists, and one office manager. Wages, salaries, and other payroll costs (i.e., health insurance premiums) will total $275,000 per year. Maintenance, supplies, marketing, and operating costs for the machine are expected to be $200,000 per year. Annual rent is $60,000 payable at the end of each year. Assume that all revenues (and expenses) occur at the end of the year. Revenues and operating expenses are expected to grow at a rate of 2.5%. The tax rate is 40%. What are the terminal year cash flows?

a. $2,268,407

b. $2,167,927

c. $2,429,287

d. $2,603,527

e. $1,336,630

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