NUR 807
Assignment 2 –
Alliance Care Hospital (ACH) is a private hospital that is currently considering a project in which
they would extensively renovate and upgrade equipment over a five-year period. The renovations
would cost $80,000,000; this would be spent over the five-year life of the project. The plan
includes expenditures of $10,000,000 per year in each of the first two years of the project and
revenues equally divided over each of the remaining years of the project. For the purposes of any
analysis assume that these cash flows and the associated tax consequences occur at the end of each
year. For this project, Alliance Care would have to invest extensively in some special new
equipment. The expected investment would be $12,000,000. This equipment would be part of an
extensive array of equipment and would be placed in an asset class with a 7-year depreciation
schedule. Alliance Care has many assets in this class and the UCC of this class is currently over
half a million dollars. At the end of the project Alliance Care expects to be able to dispose of this
special equipment by selling it to a public hospital for $4,000,000.
One of ACH’s major concerns is that if they accept the project they will be obliged to forego an
alternate opportunity, namely, a private-public partnership contract with the state of Florida to
create ambulatory centers. This contract would have netted them $4,000,000 per year in net income
(before taxes) over the next 3 years. Assume that these cash flows and any tax consequences occur
at the end of each year.
ACH believes that the additional working capital required, because of undertaking the project, will
be as follows:
Year 0 $1,000,000
Year 1 $2,500,000
Year 2 $3,000,000
Year 3 $2,000,000
Year 4 $4,500,000
Year 5 $0
Another of ACH’s major concerns is that if they reject the potential contract with the state of
Florida, it will impugn their reputation as a collaborative partner and that they will lose future
business as a result. They estimate that the potential losses will be $3,000,000 per year for each of
the next 5 years. (Assume that these losses and any related tax consequences will occur at the end
of each year.) After that time (and because of the expected success of the Project) ACH expects
that business will return to pre-project levels.
Perform an NPV analysis to determine if ACH should accept or reject the renovation project. The
Director of Finance for ACH has determined that the appropriate discount rate for a project of this
risk is 14%. An analysis of ACH’s tax returns indicates that ACH’s average income tax rate is 35%.