The Eastern College of Veterinary Medicine Veterinary Teaching Hospital (VTH), a nonprofit tax-exempt organization, is considering leasing a CT unit for their radiology service. The lease term will be $47,784 paid annually for six years. At the end of the lease, the hospital will own the unit.
The radiologists would like to charge $375 per scan, and they expect to do 330 scans in the first year and 430 scans in each subsequent year. A maintenance agreement costs $104,000 per year, but that does not cover replacement of the tube. On average, a tube will last ten years at the projected volume, and a tube replacement will cost $140,000.
(a) In Excel, calculate the net present value (NPV) of the six-year lease term, using a discount rate of 5%.
(b) What would the NPV be if the college were able to operate the CT for ten years (four more years, without lease payments)?
(c) Calculate the IRR for the ten-year investment.
(d) As the hospital director for the VTH, generate an executive summary that details why you would or would not recommend this investment. What are the risks?