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Dialyze USA Capital Budgeting NPV risk sensitivity analysis

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Dialyze USA is considering opening a new branch dialysis and infusion center in a suburban free-standing strip center. Dialyze USA is a for-profit corporation, thus subject to income taxes.
Equipment and fixtures for the center will cost $2,000,000 and be depreciated to $0 over a 5-year period on a straight line basis. Dialyze does expect to be able to continue to use this equipment for the full 10 years of the center lease.

First year billings are expected to be $1.5 million and to increase at an annual rate of 10% over the 10 year life of the center. Dialyze USA's tax rate is 25%.

Operating expenses, including the lease and personnel, are projected to be $750,000 during the first year and increase at a 5% rate per year. The equipment and fixtures will have no salvage value at the end of 10 years.

a) Calculate the NPV of opening the new center assuming a required rate of return of 7%

b) Should Dialyze open the new center?

c) What factors or assumptions would you consider might have the greatest impact on the riskiness of this evaluation?

d) Perform a sensitivity/scenario analysis for the 2 assumptions or variables you think are most critical.

e) Does this risk analysis change the decision made in part b?

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Solution Summary

Schedules shown in excel; changed growth rate and life of project to equal asset life.