solution

Lima Radiological Services has seen a growth in patient volume since its primary competitor decided to relocate to a different area of the city. To accommodate this growth, a consultant has advised that Lima invest in a new SPECT imaging system. The cost to implement the system would be $1,000,000. The useful life of this equipment is typically about seven years, and it will be depreciated over a seven-year life to a $160,000 salvage value. Additional patient volume will yield $1,200,000 in new revenues the first year, and revenues will increase by $50,000 each year thereafter, but the system is expensive to operate. Additional staff and variable costs, excluding depreciation expense, will come to $950,000 annually, but these expenses will rise by $60,000 every year. Over the life of the machine, net working capital will increase by $15,000 per year for seven years.

a. Assuming Lima Radiological Services is a non-taxpaying entity, what is the project’s NPV at a discount rate of 8 percent, and what is the project’s IRR?

b. Assuming Lima Radiological Services is a taxpaying entity and its tax rate is 35 percent, what is the project’s NPV at a discount rate of 8 percent, and what is the project’s IRR? (Hint: see Appendices C, D and E.)