The staff of Jefferson Memorial Hospital has estimated the following

jagguarpaw January 9, 2017 0 Comments

Question: The staff of Jefferson Memorial Hospital has estimated

The staff of Jefferson Memorial Hospital has estimated the following net cash flows for a satellite food

Service operation that it may open in its outpatient clinic:

Year                                         Cash Flow

  1.                                        $100,000
  2.                                        $30,000
  3.                                        $30,000
  4.                                        $30,000
  5.                                        $30,000
  6.                                        $30,000

5 Salvage Value                    $20,000

The Year 0 cash flow is the investment cost of the new food service, while the final amount (Salvage Value) is the terminal cash flow. (The clinic is expected to move to a new building in five years.) All other flows represent net operating cash flows during these five years. Jefferson’s corporate cost of capital is 10 percent. a. What is the project’s IRR? b. Assuming the project has average risk, what is its NPV? c. Now, assume that the operating cash flows in Years 1 through 5 can be as low as $20,000 or as high as $40, 000. Furthermore, the salvage value cash flow at the end of Year 5 can be as low as $0 or as high as $30.000. What is the worst case and best case IRR? The worst case and best case NPV?