# HCA 420 HCA420 Workshop Five 5.5 Dropbox Chapters 14&15 Problems Solution

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HCA 420 Workshop Five 5.5 Problems from Chapters 14 and 15 Dropbox (Indiana)

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? Itâ€™s IRR? Itâ€™s MIRR?Â

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:Â

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?Â

14.4 Great Lakes Clinic has been asked to provide exclusive healthcare services for next yearâ€™s World Exposition. Although flattered by the request, the clinicâ€™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.

a. What are the cash flows associated with the project?
b. What is the projectâ€™s IRR?
c. Assuming a project cost of capital of 10 percent, what is the projectâ€™s NPV? d. What is the projectâ€™s MIRR?Â

15.2 Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and

probabilities:Â

a. What is the projectâ€™s expected (i.e., base case) NPV assuming average risk? (Hint: The base case net cash flows are the expected cash flows in each year.)Â

b. What are the projectâ€™s most likely, worst, and best case NPVs?Â

c. What is the projects expected NPV on the basis of the scenario analysis?Â

d. What is the projectâ€™s standard deviation of NPV?

e. Assume that Heywoodâ€™s managers judge the project to have lower-than-average risk. Furthermore, the companyâ€™s policy is to adjust the corporate cost of capital up or down by 3 percentage points to account for differential risk. Is the project financially attractive?Â

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