Chapter 10 Assignment page 317 problem10.2California Imaging Center a not-for-profit business is evaluating the purchase of new diagnostic equipment The equipment which costs $600 000 has an expected life of five years and an estimated salvage value of $200 000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project’s life. On average each procedure is expected to generate $80 in cash collections during the first year of use. Thus net revenues for year 1 are estimated at 15 x 250 x $80 = $300 000.Labor and maintenance costs are expected to be $100 000 during the first year of operation while utilities will cost another $10 000 and cash overhead will increase by $5 000 per procedure during the first year. All costs and revenues are expected to increase at a 5 percent inflation rate after the first year. The center’s corporate cost of capital is 10 percent.Estimate the projects net cash flows over its five-year estimated life. (hint: use the following format as a guideYear012345Equipment CostNet RevenueLess :Labor/Maintenance costsUtilities CostsSuppliesIncremental overheadOperating IncomeEquipment Salvage ValueNet Cash FlowIb. What are the project’s NPV and IRR? (Assume for now that the project has average risk.)Insert your response here.c. Assume the project is assessed to have high risk and California Imaging Center adds or subtracts 3 percent points to adjust for project risk Now what is the project’s NPV? Does the risk assessment change how the project’s IRR is interpreted?Insert your response here.
