Question:
Biggs-Gridley Memorial Hospital, a non-taxpaying entity, is starting a new inpatient heart center on its third floor. The expected patient volume demands will generate $5,000,000 per year in revenues for the next five years. The new center will incur operating expenses, excluding depreciation, of $3,000,000 per year for the next five years. The initial cost of building and equipment is $7,000,000. 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 $800,000. The cost of capital for this project is 10 percent.
• Compute the NPV and IRR to determine the financial feasibility of this project.
• Compute the NPV and IRR to determine the financial feasibility of this project if this were a tax-paying entity with a tax rate of 30 percent.