Use the npv technique and irr method to evaluate project

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Ridgewood Healthcare Enterprises is in possession of a nonoperational 50-bed hospital. The after-tax value of the land is $2,000,000. The equipment and the building are fully depreciated and have an after-tax market value of $3,250,000. Ridgewood could either sell off its property or convert it into a new state-of-the-art acute care hospital. An analysis of the market reveals that the facility could attract 8,400 discharges per year, which is expected to increase at a rate of 3 percent per year. Projected net patient revenue per discharge is $9,000 for the first year and will increase annually by 4 percent thereafter. Projected operating expense per discharge is $7,500 for the first year and will increase annually by 6 percent thereafter. Renovation costs to create a plush facility would be $40,000,000. The new facility would be depreciated on a straight-line basis over a ten-year life to a $10 million salvage value. At the end of ten years, the land is expected to be sold for an after-tax value of $5 million. Net working capital will increase at a rate of $3,000,000 per year over the life of the project. Ridgewood has a 35 percent tax rate and a required rate of return of 9 percent. Use the NPV technique and IRR method to evaluate this project. (Hint: see Appendices C, D, and E.)

Reference no: EM13274272

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