HCA 420 Workshop Five 5.5 Problems from Chapters 14 and 15 Dropbox (Indiana)
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<strong>HCA</strong> <strong>420</strong> <strong>Workshop</strong> <strong>Five</strong> <strong>5.5</strong><br />
<strong>Problems</strong> <strong>from</strong> <strong>Chapters</strong> <strong>14</strong> <strong>and</strong> <strong>15</strong><br />
<strong>Dropbox</strong> (<strong>Indiana</strong>)<br />
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<strong>420</strong>-workshop-five-5-5-problems-<strong>from</strong>chapters-<strong>14</strong>-<strong>and</strong>-<strong>15</strong>-dropbox-indiana/<br />
<strong>HCA</strong> <strong>420</strong> <strong>Workshop</strong> <strong>Five</strong> <strong>5.5</strong> <strong>Problems</strong> <strong>from</strong> <strong>Chapters</strong> <strong>14</strong> <strong>and</strong> <strong>15</strong> <strong>Dropbox</strong> (<strong>Indiana</strong>)<br />
<strong>14</strong>.1 Winston Clinic is evaluating a project that costs $52,125 <strong>and</strong> has expected net cash inflows of $12,000<br />
per year for eight years. The first inflow occurs one year after the cost outflow, <strong>and</strong> the project has a cost of<br />
capital of 12 percent.<br />
a. What is the project’s payback?<br />
b. What is the project’s NPV? It’s IRR? It’s MIRR?<br />
c. Is the project financially acceptable? Explain your answer.<br />
<strong>14</strong>.2 Better Health, Inc. is evaluating two investment projects, each of which requires an up-front expenditure of<br />
$1.5 million. The projects are expected to produce the following net cash inflows:<br />
a. What is each project’s IRR?<br />
b. What is each project’s NPV if the cost of capital is 10 percent? 5 percent? <strong>15</strong> percent?<br />
<strong>14</strong>.4 Great Lakes Clinic has been asked to provide exclusive healthcare services for next year’s World<br />
Exposition. Although flattered by the request, the clinic’s managers<br />
want to conduct a financial analysis of the project. There will be an up-front cost of $160,000 to get the clinic in<br />
operation. Then, a net cash inflow of $1 million is expected <strong>from</strong> operations in each of the two years of the<br />
exposition. However, the clinic has to pay the organizers of the exposition a fee for the marketing value of the<br />
opportunity. This fee, which must be paid at the end of the second year, is $2 million.<br />
a. What are the cash flows associated with the project?<br />
b. What is the project’s IRR?<br />
c. Assuming a project cost of capital of 10 percent, what is the project’s NPV? d. What is the project’s MIRR?<br />
<strong>15</strong>.2 Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows <strong>and</strong><br />
probabilities:<br />
a. What is the project’s expected (i.e., base case) NPV assuming average risk? (Hint: The base case net cash<br />
flows are the expected cash flows in each year.)<br />
b. What are the project’s most likely, worst, <strong>and</strong> best case NPVs?<br />
c. What is the projects expected NPV on the basis of the scenario analysis?<br />
d. What is the project’s st<strong>and</strong>ard deviation of NPV?<br />
e. Assume that Heywood’s managers judge the project to have lower-than-average risk. Furthermore, the<br />
company’s policy is to adjust the corporate cost of capital up or down by 3 percentage points to account for<br />
differential risk. Is the project financially attractive?
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