# PLEASE SHOW ALL WORK AND CALCULATIONS. California Health Center, for-profit hospital, is evaluating the purchase of...

###### Question:

PLEASE SHOW ALL WORK AND CALCULATIONS.

California Health Center, for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated pretax 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 collections, which is net of bad debts losses and contracual allowances, in it's first year of use. Thus, net revenues for year one are estimates 15 * 250 *$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 in year one. The cost for expendable supplies is expected to average $5 per procedure during the first year. All costs and revenues except depreciation are expected to increase at a 5 percent inflation rate after the first year. The equipment falls into the MARCS five-year class for tax depreciation and is subject to the following depreciation allowances: Year Allowance$ 1 $600,000 120,000 192,000 2$ 0.2 0.32 0.19 0.12 3 4 5 6 0.11 0.06 1.00 The hospital tax rate is 40 percent, and its corporate cost of capital is 10 percent.

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