a taxpayer whose eic was previously disallowed due to reckless disregard is barred f 613499

Fall City Healthcare System, a non-taxpaying entity, is planning to purchase imaging equipment, including an MRI and ultra-sonograms for its new imaging center. The equipment will generate $2,500,000 per year in revenues for the next five years. The expected operating expenses, excluding depreciation, will increase expenses by $950,000 per year for the next five years. The initial capital investment outlay for the imaging equipment is $4,500,000, which will be depreciated on a straight-line basis to its salvage value. The salvage value at year five is $500,000. The cost of capital for this project is 9 percent.

a. Compute the NPV and IRR to determine the financial feasibility of this project.

b. Compute the NPV and IRR to determine the financial feasibility of this project if this were a taxpaying entity with a tax rate of 35 percent. (Hint: see Appendix E. Because the organization is depreciating to the salvage value, there is no tax effect on the sale of the asset.)