FIN – Rancho Verde Medical Center

Rancho Verde Medical Center a not-for profit hospital, is considering two projects. Provided below is the financial information for each project. Based on this information, please calculate the NPV, payback period, and IRR for each project. The cost of capital for this project is 14 1/8%.Project AEquipment Costs $725,000Related Start-up Costs: $ 49,000Salvage Value: $73,000Useful Life: 5 YearsStraight line depreciation is usedRevenue: $272 per procedureVariable Costs: $58 procedureAnnual fixed costs: $585,000Annual Overhead allocation: $99,000Estimated procedure in year one: 3,875It is estimated that the number of procedures will increase by 9 percent each year; fixed costs will increase by 6 percent; overhead and variable costs will increase by 7 percent; revenue per procedure will increase by 3 percent each year. (increases will begin after first year)Project BEquipment Costs $815,000Training Costs: $54,000Salvage Value: $68,000Useful Life: 5 YearsStraight line depreciation is usedRevenue: $294 per procedureVariable Costs: $82 procedureAnnual fixed costs: $598,000Annual Overhead allocation: $108,000Estimated procedure in year one: 4,175It is estimated that the number of procedures will increase by 12 percent each year; fixed costs will increase by 5 percent; overhead and variable costs will increase by 8 percent; revenue per procedure will increase by 2 percent each year. (increases will begin after first year)

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