Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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MHA Medical Center is starting a new lab test center on its third floor. The expected patient volume demands will generate $500,000 per year in revenues for the next five years. The new center will incur operating expenses, excluding depreciation, of $300,000 per year for the next five years. The initial cost of the new equipment is $700,000. Straight-line depreciation is used to estimate depreciation expense, and the equipment will be depreciated over a five-year life to their salvage value. The expected salvage value of the equipment at year five is $80,000. Compute the NPV (at 10 percent cost of capital) and IRR to determine the financial feasibility of this project if this were a tax-paying entity with a tax rate of 30 percent.

Use the following tables. * LOOK at Image 

 

                               
  Givens:         Years 0 1 2 3 4 5      
  Initial investment                   $0 $0      
  Net revenue             $0 $0 $0 $0 $0      
  Operating expenses                            
  Depreciation expense                          
  Salvage value at the end of project year                          
  Cost of capital                            
  Tax rate                            
                               
                               
  Analysis         Years 0 1 2 3 4 5      
  Initial investment           $0                
  Net revenue             $0 $0 $0 $0 $0      
  Operating expense             $0 $0 $0 $0 $0      
  Depreciation expense                 $0 $0      
  Earnings before taxes           $0 $0 $0 $0 $0      
  Tax expense             $0 $0 $0 $0 $0      
  Earnings after taxes             $0 $0 $0 $0 $0      
  Add Depreciation expense           $0 $0 $0 $0 $0      
  Net operating cash flows           $0 $0 $0 $0 $0      
  Salvage value                      $                         -        
  Project cash flows           $0 $0 $0 $0 $0 $0      
  Cost of capital             0% 0% 0% 0% 0%      
  Present value interest factors                          
  Annual PV of cash flows                          
  Sum of PV of cash flows                          
  Net present value (NPV)                          
                               
  Internal rate of return (IRR) - Use excel formula                        
                               
                               
Givens:
Initial investment
Net revenue
Operating expenses
Depreciation expense
Salvage value at the end of project year
Cost of capital
Tax rate
Analysis
Initial investment
Net revenue
Operating expense
Depreciation expense
Earnings before taxes
Tax expense
Earnings after taxes
Add Depreciation expense
Net operating cash flows
Salvage value
Project cash flows
Cost of capital
Present value interest factors
Annual PV of cash flows
Sum of PV of cash flows
Net present value (NPV)
Internal rate of return (IRR)- Use excel formula
Years
Years
0
0
$0
$0
1
$0
$0
$0
$0
$0
$0
$0
$0
$0
0%
2
2
$0
$0
$0
SO
$0
$0
$0
$0
$0
0%
3
3
$0
88
$SO
$0
$0
$0
$0
$0
0%
4
4
$0
$0
$0
$0
$0
$0
$0
$0
$0
SO
$0
0%
$
5
5
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
0%
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Transcribed Image Text:Givens: Initial investment Net revenue Operating expenses Depreciation expense Salvage value at the end of project year Cost of capital Tax rate Analysis Initial investment Net revenue Operating expense Depreciation expense Earnings before taxes Tax expense Earnings after taxes Add Depreciation expense Net operating cash flows Salvage value Project cash flows Cost of capital Present value interest factors Annual PV of cash flows Sum of PV of cash flows Net present value (NPV) Internal rate of return (IRR)- Use excel formula Years Years 0 0 $0 $0 1 $0 $0 $0 $0 $0 $0 $0 $0 $0 0% 2 2 $0 $0 $0 SO $0 $0 $0 $0 $0 0% 3 3 $0 88 $SO $0 $0 $0 $0 $0 0% 4 4 $0 $0 $0 $0 $0 $0 $0 $0 $0 SO $0 0% $ 5 5 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0%
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