10.1 Great Lake Clinic has been asked to provide exclusive healthcare services f

Question

10.1 Great Lake Clinic has been asked to provide exclusive healthcare services for next year's World Exposition. Although flatter by the request, the clinic's managers want to conduct a financial analysis of the project. An up front cost of $160,000 is needed to get the clinic in operation. Then, a net cash inflow of $1 million is expected for operations in each of the two years of the exposition. However, the clinic has to pay the organizers of the exposition a fee for the marketing value of the opportunity. This fee, which must be paid at the end of the second year, is $2 million.

a. What are the net cash flows associated with the project?

b. What is the project's IRR?

c. Assuming a project cost capital of 10 percent, what is the project's NPV?

Explanation / Answer

Year 1
$1,000,000
Year 2
($1,000,000)

Present value of the future cash flows using 10%
$82,645

c) assuming a project cost of capital of 10%, what is the projects NPV?
82,645 - 160,000 = (77,355)

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