Washington Federal Hospital plans to invest in a new MRI. The cost of the MRI is $1,500,000. The machine has an economic life of seven years, and it will be depreciated over a seven-year life to a $100,000 salvage value. Additional revenues attributed to the new machine will amount to $1,250,000 per year for seven years. Additional operating costs, excluding depreciation expense, will amount to $1,000,000 per year for seven years. Over the life of the machine, net working capital will increase by $25,000 per year for seven years.
a. Assuming that Washington Federal is a nontaxpaying entity, what is the project’s NPV at a discount rate of 7 percent, and what is the project’s IRR? Is the decision to accept or reject the same under either capital budgeting method, or does it differ?
b. Assuming that Washington Federal is a taxpaying entity and its tax rate is 40 percent, what is the project’s NPV at a discount rate of 7 percent, and what is the project’s IRR? Is the decision to accept or reject the same under either capital budgeting method, or does it differ? (Hint: see Appendices C, D, and E.)
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