The staff of Jefferson Medical Services has estimated the following net cash flo

Question

The staff of Jefferson Medical Services has estimated the following net cash flows for a food services operation that it may open in its outpatient clinic:

Year                                                    Expected Net Cash Flow

0                                                         ($100,000)

1                                                          30,000

2                                                           30,000

3                                                           30,000

4                                                           30,000

5                                                            30,000

5 (salvage value)                                   20,000

What is the project’s IRR?

Assuming the project has average risk, what is its NPV?

Now, assume that the operating cash flows in Years 1 through 5 could be as low as $20,000 or as high as $40,000.Furthermore, the salvage value cash flow at the end of Year 5 could be as low as $0 or as high as $30,000.What are the worst case and best case IRRs?The worst case and best NPVs?

Explanation / Answer

Net Present Value Cash Flow 0 -100000 1 30000 2 30000 3 30000 4 30000 5 30000 6 20000 Let the rate be 10% npv = Cash Inflows- Cash Outflows NPV = 30000*3.79+20000*.621-100000 npv= $26120 Rate = 20% NPV = 30000*2.99+20000*.401-10000 npv = -2262 IRR = Lower Rate+NPV at lower rate/ NPV at lower rate-npv at higher rate*(Higher rate - Lower rate) IRR = 10+26120/26120+2262*20-10 IRR = 19.2% NPV = 30000*3.04+2000*.415-100000 NPV = 0

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