298 The Investment Decision 14 14. Castle Rock Medical Center expects Projects X
ID: 2522607 • Letter: 2
Question
298 The Investment Decision 14 14. Castle Rock Medical Center expects Projects X and Y to generate the follo ing cash flows: Givens (in thousands) Years 0 3 ($6,500) Initial investment Net operating cash flows for Project X Net operating cash flows for Project Y Discount rate for Part a Discount rate for Part b $5,000 $3,000 $2,000 $1,600 $1,000 $1,000 $1,600 $2,000 $3,000 $5,000 13% 8% a. Determine the NPV for both projects using a cost of capital of 13 percent. b. Determine the NPV for both projects using a cost of capital of 8 percent. c. At an 8 percent discount rate, which project should be accepted? At a 13 percent discount rate, which project should be accepted? Explain.Explanation / Answer
1-
Project X
Project Y
year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 13%
year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 13%
0
-6500
-6500
0
-6500
-6500
1
5000
4424.779
1
1000
884.9558
2
3000
2349.44
2
1600
1253.035
3
2000
1386.1
3
2000
1386.1
4
1600
981.31
4
3000
1839.956
5
1000
542.7599
5
5000
2713.8
NPV
sum of present value of cash flow
3184.389
NPV
sum of present value of cash flow
1577.847
2-
Project X
Project Y
year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 8%
year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 8%
0
-6500
-6500
0
-6500
-6500
1
5000
4629.63
1
1000
925.9259
2
3000
2572.016
2
1600
1371.742
3
2000
1587.664
3
2000
1587.664
4
1600
1176.048
4
3000
2205.09
5
1000
680.5832
5
5000
3402.916
NPV
sum of present value of cash flow
4145.942
NPV
sum of present value of cash flow
2993.338
3-
At 13%
Project X should be selected as its NPV is greater than project B
at 8%
Project X should be selected as its NPV is greater than project B
1-
Project X
Project Y
year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 13%
year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 13%
0
-6500
-6500
0
-6500
-6500
1
5000
4424.779
1
1000
884.9558
2
3000
2349.44
2
1600
1253.035
3
2000
1386.1
3
2000
1386.1
4
1600
981.31
4
3000
1839.956
5
1000
542.7599
5
5000
2713.8
NPV
sum of present value of cash flow
3184.389
NPV
sum of present value of cash flow
1577.847
2-
Project X
Project Y
year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 8%
year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 8%
0
-6500
-6500
0
-6500
-6500
1
5000
4629.63
1
1000
925.9259
2
3000
2572.016
2
1600
1371.742
3
2000
1587.664
3
2000
1587.664
4
1600
1176.048
4
3000
2205.09
5
1000
680.5832
5
5000
3402.916
NPV
sum of present value of cash flow
4145.942
NPV
sum of present value of cash flow
2993.338
3-
At 13%
Project X should be selected as its NPV is greater than project B
at 8%
Project X should be selected as its NPV is greater than project B
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.