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.

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a What is the project’s payback

 

b. What is the project’s NPV? Its IRR? Its MIRR

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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. 

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