Computing NPV and IRR
Biggs-Gridley Memorial Hospital, a non-taxpaying entity, is starting a new inpatient heart center on its third floor. The expected patient volume demands will generate $5,000,000 per year in revenues for the next five years. The new center will incur operating expenses, excluding depreciation, of $3,000,000 per year for the next five years. The initial cost of building and equipment is $7,000,000. Straight-line depreciation is used to estimate depreciation expense, and the building and equipment will be depreciated over a five-year life to their salvage value. The expected salvage value of the building and equipment at year five is $800,000. The cost of capital for this project is 10 percent.
•Compute the NPV and IRR to determine the financial feasibility of this project.
•Compute the NPV and IRR to determine the financial feasibility of this project if this were a tax-paying entity with a tax rate of 30 percent.