Walton Medical Laboratory Margaret Walton spent 10 years working in the laboratory at City Hospital. During that time, she advanced to the position...

"Margaret Walton spent 10 years working in the laboratory at City Hospital. During thattime, she advanced to the position of director of the laboratory and completed an MBAdegree. She felt that opportunities for further advancement at the hospital were limitedand was looking for a new challenge. She took a course in entrepreneurship and wasfascinated by the idea of starting her own business. Walton decided that she would openan independent laboratory to provide medical tests for independent medical practices.She believed that she could help physicians reduce both their capital requirements andadministrative chores, as well as provide more accurate testing.Walton began assembling information. She discovered a piece of land available neara number of independent medical practices. The land could be purchased for $100,000,and a suitable building would cost approximately $400,000. The building would havea useful life of approximately 40 years. Laboratory equipment would cost $1 million.The equipment would have a life of 7 years for tax purposes, but would actually last10 years. Although the business could continue indefinitely, Walton wanted to do theanalysis based on the assumption of a life similar to that of the laboratory equipment:10years.In addition to fixed asses, working capital such as cash, supplies, receivables, andpayables would be needed. Walton wanted to maintain a minimum cash balance of$20,000. She estimated that $100,000 of supplies would be needed initially, and accountspayable at $40,000. She estimated that the cash, supplies, receivables, and payablescategories would double at the end of the first year and would not increase thereafter.Walton predicted revenue of $600,000 during the first year and $1,200,000 each yearthereafter. She estimated that labor expenses, including a salary for her equal to whatshe was now earning, of $300,000 in the firs year and $480,000 each year thereafter.She estimated a supplies expense of $120,000 in the first year and $190,000 each yearthereafter. SHe estimated overhead expense, other than depreciation, of $100,000 a year.Looking ahead, Walton estimated that the equipment would have a negligible valuein 10 years, while the building would have lost one-fourth of tits value and the land would still be worth $100,000. She guessed that supplies inventory could be sold for halfits cost, and other working capital items would be settled at their book values.Walton turned her attention to financing. She had limited capital of her own andwould need to seek outside investors. She had heard enough horror stories about problemsthat occurred when companies could not make payments on debts, and she wantedto avoid those troubles. Thus, she wanted to try to arrange all equity financing, anduse a bank line of credit only for temporary needs. Walton decided on a plan involvingten wealthy investors, preferably senior retired physicians who would then serve on theboard of directors. She would fund the project by creating eleven shares – one sharefree to herself as a founder’s share and one share to each of the investors. Each investorwould then invest 10 percent of the capital requirements.Walton tentatively discussed the project with several senior retire physicians to seewhat would be required. They viewed this as an investment of moderate risk andindicated that they would want a 12 percent after tax return from an investment of thistype. While several investors encourages her to continue, they were naturally unwillingto make a commitment without a proposal and a thorough financial analysis. Waltonbegan to develop a profitability analysis and a proposal. She had to choose betweenthe corporate tax form and an S form. She estimated that most investors would bein 28 percent tax brackets. All funds not needed internally would be paid out to theshareholders. She thought she could be ready to start by the first of the year, so assetswould be considered placed in service in January.Case questions1. Identify all cash flow on the assumption the business is taxed at a 28 percent taxrate.2. Prepare a net present value analysis.3. Does this investment provide a satisfactory rate of return to investors?4. Is it fair and reasonable for Walton to get one-eleventh of the company withoutputting up equity capital of her own?I want an excel file with your case project, which has bothcalculations, comments on where and how you came up with the important numbers such as depreciation, discount rate, tax rate, etc, and also brief answers to the questions of the case.