Dr. Magneto is evaluating whether to open a private MRI clinic in leased office space in a local strip mall. The clinic will run for two years and then close

Question

Before the clinic opens, the offices require $200,000 of renovations. Dr. Magneto will buy $20,000 of computer equipment and one MRI machine. The MRI machine (GE 3.0T Signa Excite HD) costs $2.4M. Assume that the renovations, computer equipment and MRI are paid for at the beginning of the first year (t=0 ) and that all three are classified as 15-year property.
Assume that the MRI machine will be sold for $500,000 at the end of the second year of business. The computer equipment will be worthless at that time.
The clinic can perform 72 scans per week for 49 operational weeks per year. The clinic will charge $600 per scan.
The clinic will need two technicians, two receptionists and one office manager. Wages, salaries and other payroll costs (i.e., health insurance premiums) will total $275,000 per year. Maintenance, supplies, marketing and operating costs for the machine are expected to be $200,000 per year. Annual rent is $60,000 payable at the end of each year. Assume that all revenues (and expenses) occur at the end of the year. The tax rate is 40% and Dr. Magneto's cost of capital is 10%. What are the operating cash flows at the end of Year 1?

MACRS Depreciation Rates
Year 10-Year 15-Year
1 10.00% 5.00%
2 18.00% 9.50%
3 14.40% 8.55%

A) $997,080
B) $1,001,480
C) $1,037,480
D) $1,048,640
E) $1,053,880

Answer 1

B