12. Buxton Community is expecting its new dialysis unit to generate the followin

Question

12. Buxton Community is expecting its new dialysis unit to generate the following cash flows: Givens Initial investment Net operating cash flows Years ($10,000,000) $1,500,000 $2,000,000 $4,000,000 $7,000,000 $14,000,000 a. Determine the payback for the new dialysis unit. b. Determine the NPV using a cost of capital of 11 percent. c. Determine the NPV at a cost of capital of 20 percent and compute the IRR d. At an 11 percent cost of capital, should the project be accepted? At a 20 percent cost of capital, should the project be accepted? Explain.

Explanation / Answer

a. Payback period = 2.85 years

Working:

b. Net present value @11% = $8,818,717

Working:

c. Net present value @20% = $3,955,761

Working:

d. The project is acceptable at both the rates of 11% and 20% as the NPV is positive at both the rates.

Total net operating cash flows 28500000 Initial investment 10000000 Payback period 2.85 years

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