Tin Man Memorial Hospital, a non-taxpaying entity, is starting a new inpatient heart center on its third floor. The expected patient volume demands will generate $4,500,000 per year in revenues for the next five years. The new center will incur operating expenses, excluding depreciation, of $2,500,000 per year for the next five years. The initial cost of building and equipment is $6,500,000. Straight-line depreciation is used to estimate depreciation expense, and the building and equipment will be depreciated over a five-year life to their salvage value. The expected salvage value of the building and equipment at year five is $500,000. The cost of capital for this project is 8 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 40 percent. (Hint: see Appendix E. Because the hospital is depreciating to the salvage value, there is no tax effect on the sale of the asset.)
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