Your uncle Aslan, an animal lover, is very disappointed that he cannot establish an animal shelter that can operate forever. However, after talking to you he realized that he needs to have a profitable business that can support itself. After talking with his wife and children, they have decided to open a veterinary clinic that would provide health services to people’s pets at regular prices and street animals for free. Your uncle wants to evaluate this project over a 10 year period.
They are going to use the entry floor apartment that they own for this clinic. This apartment is being rent to a “bakkal” for 20,000TL per year before taxes.
Clinic needs to have one ultrasound and one X-Ray machine. Ultrasound machine will cost 500,000 TL to buy and your uncle needs to pay an additional 25,000TL to have it shipped and installed. It is going to be depreciated down to a value of 0 by using the straight line method over a 10 year period. The annual maintenance expense associated with this ultrasound machine is expected to be 50,000TL per year.Your uncle estimates a selling price of 110,000Tl for this ultrasound machine at the end of year 10.
The X-Ray machine will cost 1,100,000TL. Shipping, insurance and installation costs for the X-Ray machine will be 100,000TL.Acquisition cost of the X-Ray machine is going to be fully depreciated by using the straight line method over a 16 year period and it can be used in any clinic for at least 16 years. The annual maintenance expense for the X-Ray machine is going to be 125,000TL per year.After talking to some experts in the field, your uncle estimates a selling 380,000TL for the X-Ray machine at the end of year 10.
There needs to be 1 veterinarian, 2 nurses and 1 support staff at the clinic at all times. The total salary for all of these employees is expected to be 350,000TL per year. Electricity, heating and water bill of the clinic is expected to be 6,000TL per year. After visiting the veterinary clinic close to their house, your uncle estimates the revenues from services provided to people’s pets to be 1,260,000TL per year.Material costs for these services to be 210,000TL per year.Your uncle estimates the material costs for the services provided to the street animals to be 135,000TL per year.
At the time they open up the clinic, they need to spend 12,000TL on material inventory.They need to increase the investment in material inventory by 8,000TL at the end of the 1st year when the clinic is fully operational.Your uncle wants CFs of the clinic to cover his opportunity cost.If he does not invest in the clinic, he will deposit his money in a bank account that pays 12% interest per year.The tax rate for the clinic and your uncle is 25%.
a. Calculate the CFs for the veterinary clinic project.
b. Decide whether your uncle should invest in this clinic or not. Given your analysis, briefly discuss whether CFs of the clinic cover your uncle’s opportunity cost or not.
c. Determine the maximum material cost your uncle’s clinic can have for providing services to street animals in order for the CFs of the clinic to cover your uncle’s opportunity cost.