reasonable values for the project costs of capita forlower-isk, are reaso averag
ID: 2806893 • Letter: R
Question
reasonable values for the project costs of capita forlower-isk, are reaso average-risk, and higher-risk projects? u IlS Corporate cost of capital to be 11 percent. END-OF-CHAPTER PROBLEMS .1. Great Lakes Clinic has been asked to provide exclusive healthcare services for next year's World Exposition. Although flattered by the request, the clinic's managers want to conduct a financial analysis of the project. An up-front cost of 5t6o,o00 is needed to get the clinic in operation. Then, a net cash inflow of s million is expected from operations in each of the two years of the exposition. However, the clinic has to pay the organizers of the expositiona feefor the marketing valu the second year, is $2 million. e of the opportunity. This fee, which must be paid at the end of at are the net cash flows associated with the project? D. What is the project's IRR? ing a project cost of capital of so percent, what is the projec's NP/ ng a project cost of capital of 10 percent, what is the proi of new diagnostic expected life of v ars diagnosti enter, a not-for-profit business, is evaluating the purchase equipment. The equipment, which costs $600,00o, has an and an estimated salvage value of $200,00o at that est times a day for 250 days a year ir expected toExplanation / Answer
Initial cost 160000 Net cash inflow 1000000 Terminal 2000000 (i) Net cash flows 0 1 2 Initial cost -160000 Cash inflow 1000000 1000000 Exposition fees -2000000 Net cash flows -160000 1000000 -1000000 (ii) IRR - Outflow = inflow 160000= 1000000/(1+r) - 1000000/[(1+r)^2] At r = 25% NPV = 0 Therefore IRR = 25% 0 1 2 (iii) NPV @ 10% -160000 1000000 -1000000 PV Factor 10% 1 0.909091 0.826446 PV of cash flows -160000 909090.9 -826446 NPV = -77355.4 Please provide feedback…. Thanks in advance…. :-)
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