9.7 The director of capital budgeting for Big Sky Health Systems Inc. has estima
ID: 2612773 • Letter: 9
Question
9.7
The director of capital budgeting for Big Sky Health Systems Inc. has estimated the following cash flows (in thousands of dollars) for a proposed new service:
Year Expected Net Cash Flow
0 ($100)
1 $70
2 $50
3 $20
What is the project’s payback period?
What is the project’s NPV?
What is the project’s IRR?
Explanation / Answer
What is the project’s payback period?
Project’s payback period = 1 + 30/50
Project’s payback period = 1.60 Years
Working
What is the project’s NPV?
Assuming Discount Rate be 10%, Figure are in thousands of dollars
Project’s NPV = - Initial Investment + Cash Flow in Year 1/(1+Discount Rate) + Cash Flow in Year 2/(1+Discount Rate)^2 + Cash Flow in Year 3/(1+Discount Rate)^3
Project’s NPV = -100 + 70/(1+10%) + 50/(1+10%)^2 + 20/(1+10%)^3
Project’s NPV = $ 19.98
What is the project’s IRR?
Using Excel Formula
IRR = irr(values)
IRR = irr({-100,70,50,20})
IRR = 23.56%
Year Expected Net Cash Flow Cumulative Cash flow 0 -100 -100 1 70 -30 2 50 20 3 20 40Related Questions
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