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Linda_us
Linda_us, Finance, Accounts & Homework Tutor
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Experience:  Post Graduate Diploma in Management (MBA)
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14.1 Winston Clinic is evaluating a project that costs $52,125

Customer Question

14.1 Winston Clinic is evaluating a project that costs $52,125 and has expected net cash inflows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 12 percent.
1. a. What is the project’s payback?
2. b. What is the project’s NPV? Its IRR? Its MIRR?
3. c. Is the project financially acceptable? Explain your answer.
14.2 Better Health, Inc., is evaluating two investment projects, each of which requires an up-front expenditure of $1.5 million. The projects are expected to produce the following net cash inflows:
year Project A Project B
1 $500,000 $2,000,000
2 1,000,000 1,000,000
3 2,000,000 600,000
1. a. What is each project’s IRR?
2. b. What is each project’s NPV if the cost of capital is 10 percent? 5 percent? 15 percent?

15.1 The managers of Merton Medical Clinic are analyzing a proposed project. The project’s most likely NPV is $120,000, but as evidenced by the following NPV distribution, there is considerable risk involved:

Probability NPV
0.05 ($700,000)
0.20 (250,000)
0.50 120,000
0.20 200,000
0.05 300,000
1.a. What are the project’s expected NPV and standard deviation of NPV?
b. Should the base case analysis use the most likely NPV or the expected NPV? Explain your answer.

15.3
1. a. Perform a sensitivity analysis to see how NPV is affected by changes in the number of procedures per day, average collection amount, and salvage value.
2. b. Conduct a scenario analysis. Suppose that the hospital’s staff concluded that the three most uncertain variables were number of procedures per day, average collection amount, and the equipment’s salvage value. Furthermore, the following data were developed:

Scenario Probability number of procedures average collection equipment salvage value
worst 0.25 10 $60 $100,000
most likely 0.50 15 80 200,000
best 0.25 20 100 300,000

c. Finally, assume that California Health Center’s average project has a coefficient of variation of NPV in the range of 1.0–2.0. (Hint: The coefficient of variation is defined as the standard deviation of NPV divided by the expected NPV.) The hospital adjusts for risk by adding or subtracting 3 percentage points to its 10 percent corporate cost of capital. After adjusting for differential risk, is the project still profitable?

1. d. What type of risk was measured and accounted for in Parts b and c? Should this be of concern to the hospital’s managers?
1. a. What is the firm’s optimal capital budget?
2. b. Now, suppose Medtronics’s managers want to consider differential risk in the capital budgeting process. Project A has average risk, B has below-average risk, C has above-average risk, and D has average risk. What is the firm’s optimal capital budget when differential risk is considered? (Hint: The firm’s managers lower the IRR of high-risk projects by 3 percentage points and raise the IRR of low-risk projects by the same amount.)
1. a. Assume initially that the systems both have average risk. Which one should be chosen?
2. b. Assume that System X is judged to have high risk. Allied accounts for differential risk by adjusting its corporate cost of capital up or down by 2 percentage points. Which system should be chosen?
Submitted: 1 year ago.
Category: Homework
Expert:  Linda_us replied 1 year ago.
Hello and thanks for your questions.

I can help you with your questions. However they are extensive with many parts. How much would you be willing to offer for th complete assignment. Also what is your deadline.
Thanks
Customer: replied 1 year ago.


My deadline is Sunday I will be giving a bonus for all questions answered.

Expert:  Linda_us replied 1 year ago.
OK. I will work on it.
Expert:  Linda_us replied 1 year ago.
Hi Brenda

Just to update you I will post today.
Customer: replied 1 year ago.

Hi Linda I need to edit my work will give you more money please do question 14.1 as planed in assignment. but I need this questions instead by Tuesday evening 2pm.


 


14.4 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. There will be an up-front cost of $160,000 to get the clinic in operation. Then, a net cash inflow of $1 million is expected from 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.



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

  2. b. What is the project’s IRR?

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

  4. d. What is the project’s MIRR?


 


14.6 The director of capital budgeting for Big Sky Health Systems, Inc., has estimated the following cash flows in thousands of dollars for a proposed new service:


year expected net cash flow


0 ($100)


1 70


2 50


3 20


 


The project’s cost of capital is 10 percent.



  1. a. What is the project’s payback period?

  2. b. What is the project’s NPV?

  3. c. What is the project’s IRR? Its MIRR?


 


14.7 California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project’s life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses and contractual allowances, in its first year of use. Thus, net revenues for Year 1 are estimated at 15 × 250 × $80 = $300,000.


Labor and maintenance costs are expected to be $100,000 during the first year of operation, while utilities will cost another $10,000 and cash overhead will increase by $5,000 in Year 1. The cost for expendable supplies is expected to average $5 per procedure during the first year. All costs and revenues, except depreciation, are expected to increase at a 5 percent inflation rate after the first year.


The equipment falls into the MACRS five-year class for tax depreciation and hence is subject to the following deprecation allowances:



year allowance


1 0.20


2 0.32


3 0.19


4 0.12


5 0.11


6 0.06


1.00


 


The hospital’s tax rate is 40 percent, and its corporate cost of capital is 10 percent.


a. Estimate the project’s net cash flows over its five-year estimated life.


year


0 1 2 3 4 5



equipment cost


net revenues


less: labor/ maintenance cost


utilizes costs


supplies


incremental overhead


depreciation


operating income


taxes


net operating income


Plus:depreciation


Plus: equipment salvage value


net cash flow


 


 


b. What are the project’s NPV and IRR? (Assume for now that the project has average risk.)

Expert:  Linda_us replied 1 year ago.
I can help you with these additional question as well.
Expert:  Linda_us replied 1 year ago.
Linda_us, Finance, Accounts & Homework Tutor
Category: Homework
Satisfied Customers: 7105
Experience: Post Graduate Diploma in Management (MBA)
Linda_us and 2 other Homework Specialists are ready to help you
Customer: replied 1 year ago.


I will need all work on tomorrow.

Expert:  Linda_us replied 1 year ago.
I will post the remaining answer before your deadline.
Customer: replied 1 year ago.


ok that means I will have questions 14.1 14.4, 14.6, and 14.7 by tomorrow. right?

Expert:  Linda_us replied 1 year ago.
I have already provided 14.1.

I will be provided 14.4, 14.6 an 14.7 by tomorrow.
Expert:  Linda_us replied 1 year ago.
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