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Capital Budgeting

HCA is evaluating the bulk purchase of new Hill-Rom hospital beds for its Central & West Texas region. The purchase will cost $36,000,000 and the beds have an expected life of five years. The expected pretax salvage value after five years of use is $4,000,000. In total, the beds are expected to generate $9,000,000 in revenue in the first year of operations.

Maintenance costs are expected to be $200,000 during the first year of operation, while the increase in utilities will cost another $100,000 across the system in Year 1. The cost for additional expendable supplies is expected to average $250,000 during the first year. All costs and revenues, except depreciation, are expected to increase at a 2.8% inflation rate after the first year. The hospital's aggregae tax rate is 21.15%, and its corporate cost of capital is 8.4%

a. Complete the table below, solving for the project's net cash flows over its five-year estimated life.

			0	1	2	3	4	5
Equipment cost			-$36,000,000
Net revenues
Less:	Maintenance costs
	Utilities costs
	Supplies
	Depreciation
Operating income
Taxes
Net operating income
Depreciation
Plus: After-tax equipment salvage value*
Net cash flow			-$36,000,000

b. What are the project's NPV and IRR? (Assume that the project has average risk.)

c. Based on the results of the analysis, should this project be approved?

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