2 accounting questions

15.3 California Health Center, a not-for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000 has an expected life of five years and an estimated pretax 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 collections, which is net of bad debt losses and contractual allowances, in its first year of use. Thus net revenues for Year 1 are estimated at
15 x 250 x $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 except depreciation are expected to increase at 5% inflation rate after the first year. The equipment falls into the MACRS five-year class for tax depreciation and is subject to the following depreciation allowances:
YEAR ALLOWANCE
1 0.20
2 0.32
3 0.19
4 0.12
5 0.11
6 0.06
7 1.00

The hospital’s tax rate is 40% and its corporate cost of capital is 10%.
a. Perform a sensitivity analysis to see how NPV is affected by changes in the number of procedures per day, average collection amounts and salvage value.
b. Conduct a scenario analysis. Suppose that the hospital’s staff concluded that the three most uncertain variables were number of procedures per day, average collection amount and the equipment’s salvage value. The following data was developed:

Don't use plagiarized sources. Get Your Custom Essay on
2 accounting questions
Just from $13/Page
Order Essay

Scenario Probability # of procedures avg collection salvage value
Worst 0.25 10 $ 60 $100,000
Most likely 0.50 15 $ 80 $200,000
Best 0.25 10 $100 $300,000

c. Finally assume that California Health Center’s average project has a coefficient of variation of NPV in the range of 1.0 – 2.0. The hospital adjusts for risk by adding or subtracting 3 % points to its 10% corporate cost of capital. After adjusting for differential risk, is the project still profitable?

15.4 The managers of Medtronics are evaluating the following four projects for the coming budget period. The firm’s corporate cost of capital is 14%.
PROJECT COST IRR
A $15,000 17%
B $15,000 16%
C $12,000 15%
D $20,000 13%
a. What is the firm’s optimal capital budget?
b. Now suppose Medtronic’s managers want to consider differential risk in the capital budgeting process. Project a has average risk, B has below-average risk and C has an above average risk, and D has average risk. What is the firm’s optimal capital budget when differential risk is considered? (Hint: the firm’s managers lower the IRR of high-risk projects by 3% points and raise the IRR of low risk projects by the same amount).

Place your order
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more
error: Content is protected !!
Live Chat 1 763 309 4299EmailWhatsApp

Order your essay today and save 15% with the discount code GINGER