Northeast Hospital is analyzing a potential project for a new outpatient center Please use the following facts...

Free

70.2K

Verified Solution

Question

Finance

Northeast Hospital is analyzing a potential projectfor a new outpatient center
Please use the following facts to create a 5-yearprojection of cash flow for the proposed center. Please create yourfull income statement first to include all cash and non-cashexpenses
Calculate the projects NPV, IRR, MIRR, PaybackPeriod (not discounted). Using these calculations, do you recommendthat they should proceed with this project? Explain youranswer
Year 1 Year 2 Year 3 Year 4 Year 5
Total projected Visits 52500
Average Revenue per visit $Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 75.00
Average Variable Cost per Visit $Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 50.00
Total Fixed Costs $Â Â Â Â Â Â Â Â Â 500,000.00
Purchase Price for Equipment $Â Â Â Â Â 4,500,000.00
Monthly Rental Cost to Occupy the New Site $Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 5,000.00
Salvage Values of the Equipment (end of Year5) $Â Â Â Â Â Â Â Â Â 750,000.00
Corporate Tax Rate 40%
Cost of Capital 8%
Other Assumptions
1) Projected Visits are Expected to increase by 10%in Year 2, 5% in Year 3 and 3% each Year thereafter
2)Â Â Negotiation with payers indicate thatrevenue rate (ie payment per visits) will increase by 2% each yearand 5% in year 5
3)Â Â Variable Costs are expected to riseat a rate of 2% per year
4) Fixed Costs are expected to rise at a rate of 1%per year
6) Rent rates will be increased by 2.5% at the endof each year
6) The equipment will depreciate based on thestraight-line method of depreciation, a 5-year estimated life andthe equipment will be sold at salvage value at the end of year5
7)Â Â Tax rate will remain constant for theentire 5-year Period and do not assume any tax losscarryforward

Answer & Explanation Solved by verified expert

4.5 Ratings (968 Votes)

No they should not proceed with project as the project is not even able to earn cost of capital over the period.

	Year 1	Year 2	Year 3	Year 4	Year 5
Project visits	Â Â Â Â Â Â Â Â Â Â 52,500.00	Â Â Â Â Â Â Â Â 57,750.00	Â Â Â Â Â Â Â Â 60,637.50	Â Â Â Â Â Â Â Â 62,456.63	Â Â Â Â Â Â Â Â 64,330.32
Revenue Rate p.v.	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 75.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 76.50	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 78.03	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 79.59	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 83.57
Variable cost p.v.	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 50.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 51.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 52.02	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 53.06	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 54.12
Contribution p.v.	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 25.00	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 25.50	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 26.01	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 26.53	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 29.45
Total Contribution	Â Â Â Â 1,312,500.00	Â Â 1,472,625.00	Â Â 1,577,181.38	Â Â 1,656,986.75	Â Â 1,894,432.95
Fixed Cost	Â Â Â Â Â Â Â Â 500,000.00	Â Â Â Â Â Â 505,000.00	Â Â Â Â Â Â 510,050.00	Â Â Â Â Â Â 515,150.50	Â Â Â Â Â Â 520,302.01
Rent	Â Â Â Â Â Â Â Â Â Â 60,000.00	Â Â Â Â Â Â Â Â 61,500.00	Â Â Â Â Â Â Â Â 63,037.50	Â Â Â Â Â Â Â Â 64,613.44	Â Â Â Â Â Â Â Â 66,228.77
Depreciation	Â Â Â Â Â Â Â Â 750,000.00	Â Â Â Â Â Â 750,000.00	Â Â Â Â Â Â 750,000.00	Â Â Â Â Â Â 750,000.00	Â Â Â Â Â Â 750,000.00
EBT	Â Â Â Â Â Â Â Â Â Â Â Â Â 2,500.00	Â Â Â Â Â Â 156,125.00	Â Â Â Â Â Â 254,093.88	Â Â Â Â Â Â 327,222.82	Â Â Â Â Â Â 557,902.18
Tax	Â Â Â Â Â Â Â Â Â Â Â Â Â 1,000.00	Â Â Â Â Â Â Â Â 62,450.00	Â Â Â Â Â Â 101,637.55	Â Â Â Â Â Â 130,889.13	Â Â Â Â Â Â 223,160.87
EAT	Â Â Â Â Â Â Â Â Â Â Â Â Â 1,500.00	Â Â Â Â Â Â Â Â 93,675.00	Â Â Â Â Â Â 152,456.33	Â Â Â Â Â Â 196,333.69	Â Â Â Â Â Â 334,741.31
Depreciation	Â Â Â Â Â Â Â Â 750,000.00	Â Â Â Â Â Â 750,000.00	Â Â Â Â Â Â 750,000.00	Â Â Â Â Â Â 750,000.00	Â Â Â Â Â Â 750,000.00
Total earning for fund provider	Â Â Â Â Â Â Â Â 751,500.00	Â Â Â Â Â Â 843,675.00	Â Â Â Â Â Â 902,456.33	Â Â Â Â Â Â 946,333.69	Â Â 1,084,741.31
Asset Residual value					Â Â Â Â Â Â 750,000.00
Cash Flow	Â Â Â Â Â Â Â Â 751,500.00	Â Â Â Â Â Â 843,675.00	Â Â Â Â Â Â 902,456.33	Â Â Â Â Â Â 946,333.69	Â Â 1,834,741.31

Cash outflow at 0 period	-4,500,000
Cost of Capital	8%


Cash Flow	Present Value		Discount @5%
-4,500,000	-4,500,000		-4,500,000
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 751,500.00	Â Â Â Â Â Â Â Â Â Â Â Â 695,833	751500/(1.08)	Â Â Â Â Â Â Â Â Â Â Â Â Â 715,714
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 843,675.00	Â Â Â Â Â Â Â Â Â Â Â Â 723,315	843675/(1.08)^2	Â Â Â Â Â Â Â Â Â Â Â Â Â 765,238
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 902,456.33	Â Â Â Â Â Â Â Â Â Â Â Â 716,399	902456/(1.08)^3	Â Â Â Â Â Â Â Â Â Â Â Â Â 779,576
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 946,333.69	Â Â Â Â Â Â Â Â Â Â Â Â 695,584	946333/(1.08)^4	Â Â Â Â Â Â Â Â Â Â Â Â Â 778,551
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1,834,741.31	Â Â Â Â Â Â Â Â Â 1,248,694	1084741/(1.08)^5	Â Â Â Â Â Â Â Â Â 1,437,568
NPV	-420,175		-23,353

IRR	Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.0482	5%-3%/(420175-23353)*23353
	4.82%
Payback period=	4.576	4+ 1/1834741*1056035

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Northeast Hospital is analyzing a potential projectfor a new outpatient center

Please use the following facts to create a 5-yearprojection of cash flow for the proposed center. Please create yourfull income statement first to include all cash and non-cashexpenses
Calculate the projects NPV, IRR, MIRR, PaybackPeriod (not discounted). Using these calculations, do you recommendthat they should proceed with this project? Explain youranswer


				Year 1	Year 2	Year 3	Year 4	Year 5
Total projected Visits			52500
Average Revenue per visit			$Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 75.00
Average Variable Cost per Visit		$Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 50.00
Total Fixed Costs			$Â Â Â Â Â Â Â Â Â 500,000.00
Purchase Price for Equipment		$Â Â Â Â Â 4,500,000.00
Monthly Rental Cost to Occupy the New Site	$Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 5,000.00
Salvage Values of the Equipment (end of Year5)	$Â Â Â Â Â Â Â Â Â 750,000.00
Corporate Tax Rate			40%
Cost of Capital			8%

Other Assumptions
1) Projected Visits are Expected to increase by 10%in Year 2, 5% in Year 3 and 3% each Year thereafter
2)Â Â Negotiation with payers indicate thatrevenue rate (ie payment per visits) will increase by 2% each yearand 5% in year 5
3)Â Â Variable Costs are expected to riseat a rate of 2% per year
4) Fixed Costs are expected to rise at a rate of 1%per year
6) Rent rates will be increased by 2.5% at the endof each year
6) The equipment will depreciate based on thestraight-line method of depreciation, a 5-year estimated life andthe equipment will be sold at salvage value at the end of year5
7)Â Â Tax rate will remain constant for theentire 5-year Period and do not assume any tax losscarryforward