1 - Assuming an interest rate of 3% per year (effective), calculate the feasibility of each option. You can use either Present Worth Analysis or Equivalent Uniform Worth Analysis. In this part, your calculation should be done without the use of Excel. Show your equations and the results. 2 - Using linear interpolation, calculate the rate of return for each option. Here, your calculation should be implemented using Excel.3 - Assuming that the initial equipment can be depreciated over the course of 20 years and usingDouble Decline Balance Depreciation, calculate the depreciation schedule for the equipment.4- Assume a state income tax of 5%. Calculate the after-tax cashflow for each option assuming the depreciation used. Use only the depreciation on question 2. **Option A: New Facility**1. **One-Time Costs:** - Construction: $50 million (Year 0) - Equipment: $25 million (Year 0) - Licensing & consulting: $5 million (Year 0) - Initial marketing campaign: $3 million (Year 1)2. **Annual Values:** - Operations & additional staff: $10 million/year (Year 2 onwards) - Maintenance: $3 million/year (Year 2 onwards) - Technology updates: $1.5 million/year (Year 4 onwards)3. **Overhauls:** - Equipment repairs: $18 million (Year 10) - Facility upgrades: $25 million (Year 15)4. **Revenue:** - From Year 3 to 10: Starting at $60 million and increasing by $5 million annually. - From Year 11 onward: Stabilizing at $100 million annually. - Salvage Value of existing equipment: $25 million (Year 20)---**Option B: Upgrading Existing Infrastructure**1. **One-Time Costs:** - Renovations: $35 million (Year 0) - Medical equipment: $20 million (Year 0) - Licensing & consulting: $5 million (Year 0) - Initial marketing campaign: $2 million (Year 1)2. **Annual Values:** - Operations & additional staff: $7 million/year (Year 2 onwards) - Maintenance: $2 million/year (Year 2 onwards) - Technology updates: $1.2 million/year (Year 3 onwards)3. **Overhauls:** - Equipment repairs: $13 million (Year 10) - Facility upgrades: $20 million (Year 15)4. **Revenue:** - From Year 2 to 9: Starting at $18 million and increasing by $5 million annually. - From Year 10 onward: Stabilizing at $58 million annually. - Salvage Value: $15 million (Year 20) The community of Rivertown has a single public hospital, Rivertown General, which has been serving its residents for over 50 years. With the advancements in medical technology and the growing population, the hospital's current facilities and equipment are becoming outdated, causing patients to seek medical care in neighboring cities. In response to this, the hospital board has proposed the construction of a new wing, dedicated to state-of-the-art surgical facilities and patient rooms.Rivertown General Hospital is considering two primary options:**Option A:** Build a brand-new wing dedicated primarily to surgeries, including state-of-the-art operation theaters, recovery rooms, and necessary facilities. This would cater to a larger patient demographic and potentially draw patients from neighboring towns, making the hospital a regional healthcare hub.**Option B:** Upgrade the existing infrastructure, which includes renovating some parts of the current structure and purchasing new medical equipment. This approach is less disruptive to current operations but may not cater to the growing population in the long run.The estimated costs and benefits associated with each project are (for the next 20 years):### Option A: Building a New Wing1. **One-Time Costs:** - Land & site preparation: $10 million (Year 0) - Construction: $100 million ($50 million in Year 0 and $50 million in Year 1) - Medical equipment: $25 million (Year 0) - Licensing and consulting: $15 million (spread across Years 0 and 1) - Initial marketing campaign: $5 million (Year 2)2. **Annual Values:** - Operations & staff: $11 million/year (Year 2 onwards) - Maintenance: $2.5 million/year (Year 2 onwards)

Present worth, also known as present value or discounted cash flow, is a financial concept that…

Answered: Option A: Building a New Wing 1.…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Question

100%

1 - Assuming an interest rate of 3% per year (effective), calculate the feasibility of each option.
You can use either Present Worth Analysis or Equivalent Uniform Worth Analysis. In this part, your
calculation should be done without the use of Excel. Show your equations and the results.

2 - Using linear interpolation, calculate the rate of return for each option. Here, your calculation
should be implemented using Excel.

3 - Assuming that the initial equipment can be depreciated over the course of 20 years and using
Double Decline Balance Depreciation, calculate the depreciation schedule for the equipment.

4- Assume a state income tax of 5%. Calculate the after-tax cashflow for each option assuming
the depreciation used. Use only the depreciation on question 2.

**Option A: New Facility**

1. **One-Time Costs:**
- Construction: $50 million (Year 0)
- Equipment: $25 million (Year 0)
- Licensing & consulting: $5 million (Year 0)
- Initial marketing campaign: $3 million (Year 1)

2. **Annual Values:**
- Operations & additional staff: $10 million/year (Year 2 onwards)
- Maintenance: $3 million/year (Year 2 onwards)
- Technology updates: $1.5 million/year (Year 4 onwards)

3. **Overhauls:**
- Equipment repairs: $18 million (Year 10)
- Facility upgrades: $25 million (Year 15)

4. **Revenue:**
- From Year 3 to 10: Starting at $60 million and increasing by $5 million annually.
- From Year 11 onward: Stabilizing at $100 million annually.
- Salvage Value of existing equipment: $25 million (Year 20)

---

**Option B: Upgrading Existing Infrastructure**

1. **One-Time Costs:**
- Renovations: $35 million (Year 0)
- Medical equipment: $20 million (Year 0)
- Licensing & consulting: $5 million (Year 0)
- Initial marketing campaign: $2 million (Year 1)

2. **Annual Values:**
- Operations & additional staff: $7 million/year (Year 2 onwards)
- Maintenance: $2 million/year (Year 2 onwards)
- Technology updates: $1.2 million/year (Year 3 onwards)

3. **Overhauls:**
- Equipment repairs: $13 million (Year 10)
- Facility upgrades: $20 million (Year 15)

4. **Revenue:**
- From Year 2 to 9: Starting at $18 million and increasing by $5 million annually.
- From Year 10 onward: Stabilizing at $58 million annually.
- Salvage Value: $15 million (Year 20)

Transcribed Image Text:The community of Rivertown has a single public hospital, Rivertown General, which has been serving its residents for over 50 years. With the advancements in medical technology and the growing population, the hospital's current facilities and equipment are becoming outdated, causing patients to seek medical care in neighboring cities. In response to this, the hospital board has proposed the construction of a new wing, dedicated to state-of-the-art surgical facilities and patient rooms. Rivertown General Hospital is considering two primary options: **Option A:** Build a brand-new wing dedicated primarily to surgeries, including state-of-the-art operation theaters, recovery rooms, and necessary facilities. This would cater to a larger patient demographic and potentially draw patients from neighboring towns, making the hospital a regional healthcare hub. **Option B:** Upgrade the existing infrastructure, which includes renovating some parts of the current structure and purchasing new medical equipment. This approach is less disruptive to current operations but may not cater to the growing population in the long run. The estimated costs and benefits associated with each project are (for the next 20 years): ### Option A: Building a New Wing 1. **One-Time Costs:** - Land & site preparation: $10 million (Year 0) - Construction: $100 million ($50 million in Year 0 and $50 million in Year 1) - Medical equipment: $25 million (Year 0) - Licensing and consulting: $15 million (spread across Years 0 and 1) - Initial marketing campaign: $5 million (Year 2) 2. **Annual Values:** - Operations & staff: $11 million/year (Year 2 onwards) - Maintenance: $2.5 million/year (Year 2 onwards)

Expert Solution

Step by step

Solved in 4 steps

SEE SOLUTION Check out a sample Q&A here