Estimate the project’s 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 revenues Less: Labor/maintenance costs Utilities costs Supplies Incremental overhead Operating income Equipment salvage value Net cash flow What are the project’s NPV and IRR? (Assume for now that the project has average risk.) Assume that the project is assessed to have high risk and that 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?
10.2 California Imaging Center, a not-for-profit business, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated 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 cash collections during the first year of use. Thus, net revenues for year 1 are estimated 15×250× at $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
- Estimate the project’s net
cash flows over its five-year estimated life. (Hint: Use the following format as a guide.)
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Net revenues |
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Less: Labor/maintenance costs |
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Utilities costs |
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Supplies |
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Incremental overhead |
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Operating income |
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Equipment salvage value |
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Net cash flow |
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- What are the project’s NPV and IRR? (Assume for now that the project has average risk.)
- Assume that the project is assessed to have high risk and that 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?
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