Washington Federal Hospital plans to invest in a new X-ray machine. The cost of the machine is $800,000. The machine has an economic life of seven years, and it will be depreciated over a seven-year life to a $100,000 salvage value. Additional revenues attributed to the new machine will amount to $600,000 per year for seven years. Additional operating costs, excluding depreciation expense, will amount to $400,000 per year for seven years. Over the life of the machine, net working capital will increase by $50,000 per year for seven years.
a. Assuming Washington Federal is a non-taxpaying entity, what is the projectĂ˘â‚¬â„˘s NPV at a discount rate of 7 percent, and what is the projectĂ˘â‚¬â„˘s IRR?
b. Assuming Washington Federal is a taxpaying entity and its tax rate is 40 percent, what is the projectĂ˘â‚¬â„˘s NPV at a discount rate of 7 percent, and what is the projectĂ˘â‚¬â„˘s IRR? (Hint: see Appendices C, D, and E.)
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