14.1 Winston Clinic is evaluating a project that costs $52,125 and has expected net cash flows of $12,000 per
year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of
capital of 12 percent.
a. What is the project’s payback?
b. What is the project’s NPV? It’s IRR?
c. Is the project financially acceptable? Explain your answer
Year Project A Project B
1 $500,000 $2,000,000
2 $1,000,000 $1,000,000
3 $2,000,000 $600,000
a. What is each project’s IRR?
b. What is each project’s NPV if the cost of capital is 10 percent? 5 percent? 15 percent?
14.4 Great Lakes Clinic has been asked to provide exclusive healthcare services for next year’s World Exposition. Although flattered by the request, the clinic’s managers want to conduct a financial analysis of the project. There will be an upfront cost of $160,000 to get the clinic in operation. Then net cash inflow of $1m million is expected from operations in each of the two years of the exposition. However, the clinic has to pay the organizers fee, which must be paid at the end of the second year, is $2 million.
(a.)What are the cash flows associated with the project?
(b) What is the project’s IRR?
(c) Assuming a project cost of capital of 10 percent, what is the project’s NPV?
(d) What is the project’s MIRR?
15.1 The managers of Merton Medical Clinic are analyzing a proposed project. The project’s most likelyNPV is $120,000, but, as evidenced by the following NPV distribution, there is considerable risk
involved:
Probability NPV
0.05 ($700,000)
0.20 ($250,000)
0.50 ($120,000)
0.20 ($200,000)
0.05 ($300,000)
a.) What are the project’s expected NPV and standard deviation of NPV?
b.) Should the base case analysis use the most likely NPV or expected NPV? Explain your answer.
15.2 Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows andprobabilities:
Year Prob=0.2Prob=0.6 Prob=0.2
0 ($100,000) ($100,000) ($100,000)
1 $20,000 $30,000 $40,000
2 $20,000 $30,000 $40,000
3 $20,000 $30,000 $40,000
4 $20,000 $30,000 $40,000
5 $30,000 $40,000 $50,000
The Year 5 values include salvage value. Heywood’s corporate cost of capital is 10 percent.
a. What is the project’s expected (i.e., base case) NPV assuming average risk? (Hint: The base case net cash flows are the expected cash flows in each year.)
b. What are the project’s most likely, worst, and best case NPVs?
c. What is the project’s expected NPV on the basis of the scenario analysis?
d. What is the project’s standard deviation of NPV?
e. Assume that Heywood’s managers judge the project to have higher-than-average risk. Furthermore, the company’s policy is to adjust the corporate cost of capital up or down by 3 percentage points to account for differential risk. Is the project financially attractive?
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