1. Biogen, Inc. has a cost of capital of 9%, and it has a project with the follo
ID: 2388380 • Letter: 1
Question
1. Biogen, Inc. has a cost of capital of 9%, and it has a project with the following cashflows. What is the NPV of this project?
Year Net Cash Flow
0 -100,000
1 -20,000
2 20,000
3 100,000
4 150,000
5 175,000
2. Your organization has been asked to invest in a continuing care retirement center. Your
investment will be $600,000 per year for the next five years. After five years, cash flows
will be $400,000 per year for the next 15 years. If your discount rate is 10 percent:
a) What is the present value of the investment?
b) What is the present value of the cash flows?
c) What is the profitability index?
Explanation / Answer
1) NPV = (-100000) + (-20000/(1+.09)^1) + (20000/(1+.09)^2) + (100000/(1+.09)^3) + (150000/(1+.09)^4) + (175000/(1+.09)^5) = $195,705.10 2) a. ($2,274,472.06) b. $3,042,431.80 c. $1.34 a. Present value of the investment = the positive value of -PV(0.1,5,-600000,0,0) b. Present value of cash flows = the positive value of -PV(0.1,15,400000,0,0) c. profitability index = $3,042,431.80/$2,274,472.06)
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