Unit 9

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? Its IRR? Its 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:

 

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? 

   

15.1 The managers of Merton Medical Clinic are analyzing a proposed project. The project’s most likely NPV 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 the expected NPV? Explain your answer.