llows, would your imes wer change answ 10 $75 $75,000 per year cash inflow ay as

Question

llows, would your imes wer change answ 10 $75 $75,000 per year cash inflow ay as the progrum cash outflow as the program is ramping up r cash inflow as the program starts generating better outcomes ou are the chief financial officer at Mercy General d CEO has asked you to analyze two proposed capital HospialProject X and Project Y. Each project requires a net investment act inis 10 percent. The projects' expected net cash flows are as estment outlay of $75,000, and the cost of capital for cach ents-Project X and I follows: Year Project X Project Y 0 (S75,000) (S75,000) 20,000 50,000 20,000 15,000 3 20,000 15,000 430,000 10,000 2 a. Calculate each project's net present value (NPV) and internal rate of return (IRR). b. Which project (or projects) is financially acceptable? If you reach different conclusions regarding the financial acceptability of Project X and Project Y, explain why, given that both projects return total cash flows of $90,000 over the four years.

Explanation / Answer

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

Project X:

NPV = -75000 + 20000/(1+0.1)^1 + 20000/(1+0.1)^2 + 20000/(1+0.1)^3 + 30000/(1+0.1)^4 = -4772.56

Project Y:

NPV = -75000 + 50000/(1+0.1)^1 + 15000/(1+0.1)^2 + 15000/(1+0.1)^3 + 10000/(1+0.1)^4 = 951.10

IRR:

IRR is the rate at which NPV = 0

Project X:

NPV = -75000 + 20000/(1+IRR)^1 + 20000/(1+IRR)^2 + 20000/(1+IRR)^3 + 30000/(1+IRR)^4 = 0

IRR = 7.21%

Project Y:

NPV = -75000 + 50000/(1+IRR)^1 + 15000/(1+IRR)^2 + 15000/(1+IRR)^3 + 10000/(1+IRR)^4 = 0

IRR = 10.81%

Both NPV and IRR are higher for project Y. Hence, we choose project Y.

We do not reach different conclusions with these projects even though IRR is a measure of internal return generated, where as NPV is the present value of the investments.

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.