FIN – California Health Center

California Health Center, a not-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 debt losses and contractual allowances, in its first year of use. Thus net revenues for Year 1 are estimated at 15 x 250 x $80 = $300,000Labor 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 1. 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 5% inflation rate after the first year.The center’s corporate cost of capital is 10 percent.a. Estimate the project’s net cash flows over its five-year estimated life.Year (use the following as a guide)0 1 2 3 4 5Equipment CostNet revenuesLess; Labor/maintenance costsUtilities costsSuppliesIncremental overheadDepreciation ___ ___ ___ ___ ___Operating incomeTaxes ____ ____ ____ ___ ____Net operating incomePlus; DepreciationPlus: Equipment salvage value ___ ___ ___ ___ ___ ___Net cash flow === === === === === ===b. What are the project’s NPV and IRR? (Assume for not the project has average risk)c. Assume the project is assessed to have high risk and California Imaging Center adds or subtracts 3 percentage points to adjust for project risk. Now, what is the project’s NPV? Does the risk assessment change how the project’s IRR is interpreted?