The Board of Trustees has decided that we should attempt to expand our service offering. They want you to evaluate the information below and determine if this is a project we should move forward with.
The MRI Trailer costs $600,000 and has an expected life of 5 years with an estimated salvage value of $200,000 at that time. After some extensive research, the numbers we have come up with look like this:
- 15 tests per day for 250 days per year for each year of the projects life
- Each procedure is expected to generate $80 in cash collections during the first year of use (Net revenue for year 1 is 15*250*80=$300,000)
- Labor and Maintenance costs are expected to be $100,000 during the first year
- Utilities will cost $10,000 in year one and there is an incremental overhead increase of $5,000 beginning in year one
- Cost for expendable supplies is expected to be $5 per procedure
- Costs and revenues are expected to increase at a 5% inflation rate
- Our corporate cost of capital is 10%
In the Excel spreadsheet template:
- Estimate the project's net cash flow over the 5 year estimated life. I want you to use the properties (formulas) in Excel here.
- Determine the project's NPV and IRR (Use the excel formulas to determine this as well)
- Is this a project we should move forward with? (Consider NPV and strategic value here)---This can be written in text into your excel sheet