1. Urban Hospital is considering a contract to provide basic medical services on

Question

1. Urban Hospital is considering a contract to provide basic medical services on location at various corporations in the area. The start-up costs to Urban are $125,000, all paid in cash at the beginning of the contract. The contract could provide net cash flows of $5,000 per month. The contract with the corporations last for three year. Urban only invests in projects that earn an annual rate of return of at least 18%. What rate of return would Urban earn on the contract?? Should Urban accept the contract?? Why??

Explanation / Answer

Monthly rate of interest is calculated using RATE formula of excel

Monthly rate = RATE(36,5000,-125000) = 2.12%

Equivalent annual rate = (1 + Monthly rate)12 - 1 = 28.64%

As the rate of return of project is higher than the Minimum acceptable rate of return, the project should be accepted

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