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.
a What is the projectâ€™s payback
b. What is the projectâ€™s NPV? Its IRR? Its MIRR
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
a What is each projectâ€™s IRR
b What is each projectâ€™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 projectâ€™s most likely NPV is $120,000, but as evidenced by the following NPV distribution, there is considerable risk involved:
a What are the projectâ€™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.