1. Assume that you are the chief financial officer at Porter Memorial Hospital.
ID: 2761181 • Letter: 1
Question
1. Assume that you are the chief financial officer at Porter Memorial Hospital. The CEO has asked you to analyze two proposed capital investments—Project X and Project Y. Each project requires a net investment outlay of $10,000, and the cost of capital for each project is 12 percent.
The projects’ expected net cash flows are:
Year
Project X
Project Y
0
($10,000)
($10,000)
1
5,500
3,000
2
3,000
3,000
3
3,000
3,000
4
2,000
3,000
a. Calculate each project’s payback period and net present value.
b. Which project (or projects) is financially acceptable? Explain your answer.
Year
Project X
Project Y
0
($10,000)
($10,000)
1
5,500
3,000
2
3,000
3,000
3
3,000
3,000
4
2,000
3,000
Explanation / Answer
Project X
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
there fore payback period = 2 + (0-(-1500))/(1500-(-1500)) = 2.5years
Project Y
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
there fore payback period = 3 + (0-(-1000))/(2000-(-1000)) =3.33years
b
Project X is acceptable as its NPV is postive and higher and payback period is lesser than Project Y
Year Cash flow stream Cumulative cash flow 0 -10000 -10000 1 5500 -4500 2 3000 -1500 3 3000 1500 4 2000 3500Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.