HCA 420 Workshop Five 5.5 Problems from Chapters 14 and 15 Dropbox (Indiana)
14.1 Winston Clinic is evaluating a project that costs $52,125 and has expected net cash inflows 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? It’s MIRR?
c. Is the project financially acceptable? Explain your answer.
14.2 Better Health, Inc. is evaluating two investment projects, each of which requires an up-front expenditure of $1.5 million. The projects are expected to produce the following net cash inflows:
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 up-front cost of $160,000 to get the clinic in operation. Then, a net cash inflow of $1 million is expected from operations in each of the two years of the exposition. However, the clinic has to pay the organizers of the exposition a fee for the marketing value of the opportunity. This 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?
15.2 Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and
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 projects 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 lower-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?