23 Jul DOES THE RISK ASSESSMENT CHANGE HOW THE PROJECTS IRR IS INTERPRETED?
California Imaging Center a not-for-profit business is evaluating the purchase of new diagnostic Show more California Imaging Center a not-for-profit business is evaluating the purchase of new diagnostic equipment The equipment which costs $600000 has an expected life of five years and an estimated salvage value of $200000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the projects 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 = $300000. Labor and maintenance costs are expected to be $100000 during the first year of operation while utilities will cost another $10000 and cash overhead will increase by $5000 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 centers corporate cost of capital is 10 percent. a.Estimate the projects net cash flows over its five-year estimated life. (hint: use the following format as a guide Year 0 1 2 3 4 5 Equipment Cost Net Revenue Less :Labor/Maintenance costs Utilities Costs Supplies Incremental overhead Operating Income Equipment Salvage Value Net Cash Flow I b. What are the projects NPV and IRR? (Assume for now that the project has average risk.) 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 projects NPV? Does the risk assessment change how the projects IRR is interpreted? Show less
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