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 at 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 1. The cost for expendable supplies is expected to average $ 5 per procedure during the first year. All costs and revenues are expected to increase at a 5 percent 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. ( 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 —— ——- ——- —— ——- ——-
b. What are the project’s NPV and IRR? (Assume for now that 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?
13.5 Consider the following financial statements for Green Valley Nursing Home Inc., a for- profit, long- term care facility:
Green Valley Nursing Home Inc. Statement of Income and Retained Earnings Year Ended December 31 , 2012
Revenue:
Net patient service revenue $ 3,163,258 other revenue 106,146
Total revenues $ 3,269,404
Expenses:
Salaries and benefits $ 1,515,438 Medical supplies and drugs 966,781 Insurance and other 296,357 Provision for bad debts 110,000 Depreciation 85,000
Interest 206,780
Total expenses $ 3,180,356 Operating income $ 89,048 Provision for income taxes 31,167 Net income $ 57,881
Retained earnings, beginning of year $ 199,961
Retained earnings, end of year $ 257,842
Assets Current Assets:
Cash $ 105,737
Short- term securities 200,000
Net patient accounts receivable 215,600
Supplies 87,655
Total current assets $ 608,992
Property and equipment $ 2,250,000
Less accumulated depreciation 356,000
Net property and equipment $ 1,894,000
Total assets $ 2,502,992
Liabilities and Shareholders’ Equity Current Liabilities:
Accounts payable $ 72,250
Accrued expenses 192,900
Notes payable 100,000
Current portion of long- term debt 80,000 Total current liabilities $ 445,150
Long- term debt $ 1,700,000 Shareholders’ Equity:
Common stock, $ 10parvalue$ 100,000
Retained earnings 257,842
Total share holders ’equity $ 357,842
Total liabilities and shareholders’ equity $ 2,502,992
a. Perform a DuPont analysis on Green Valley. Assume that the industry average ratios are as follows:
Total margin 3.5%
Total asset turnover 1.5
Equity multiplier 2.5
Return on equity 13.1%
b. Calculate and interpret the following ratios:
Industry Average Return on assets 5.2%
Current ratio 2.0
Days cash on hand 22 days
Average collection period 19 days
Debt ratio 71%
Debt- to- equity ratio 2.5
Times- interest- earned ratio 0.6
Fixed asset turnover ratio 1.4
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