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# Winston Clinic is evaluating a project that costs \$52,125 and has expected net cash flows of \$12,000 per

year for eight years. The first inflow occurs one year a
What is the project's payback? break even
Capital Budget Methods- four ways t
Note: format is x.xx years. 4.34 years Payback Peiod- cost/annual cash flow
ARR Accounting Rate of Return-
= retun on investment in percen
What is the project's NPV? Net Present Value- NPV- neg and po
added present cash flows- cost of pro
Note: format is \$x,xxx \$7,487 will make/save money.
IRR- Internal rare of return
What is the project's IRR? ammount invested/net cash flows= d
Find value in annuity table, in row th
Note: format is xx.x% 16.0%

## Is the project financially acceptable? depreciation

(initial cost- salvage value)/ five years
Note: Yes or No Yes

Assume that you are the CFO at Porter Memorial Hospital. The CEO has asked you to analyze two proposed capital investments--Project X and Project Y. Eac

## Year Project X Project Y

0 (\$10,000) ###
1 \$6,500 \$3,000
2 \$3,000 \$3,000
3 \$3,000 \$3,000
4 \$1,000 \$3,000
What is the payback period for Project X?
2.17 years
What is the payback period for Project Y?
3.33 years
Note: Format is x.xx years

## What is the NPV for Project X?

\$966
What is the NPV for Project Y?
(\$888)
Note: Format is \$x,xxx if positive; (\$x,xxx) if negative.

## What is the IRR for Project X?

18.03%
What is the IRR for Project Y?
7.71%
Note: Format is xx.xx% if positive; -xx.xx% if negative.

## Based on your analysis, which project is financially acceptable?

X
Note: Enter X or Y
Capitol Health Plans, Inc. is evaluating two different methods for providing home health services to its members. Both methods involve contracting out for serv

## Year Method A Method B

0 (\$300,000) (\$120,000)
1 (\$66,000) (\$96,000)
2 (\$66,000) (\$96,000)
3 (\$66,000) (\$96,000)
4 (\$66,000) (\$96,000)
5 (\$66,000) (\$96,000)
What is the IRR for Method A?
NA
What is the IRR for Method B?
NA
Note: Think about this one carefully. Enter positive results as xx.x% Enter negative results as -xx.x%. Enter null results as NA.

## Note: Enter positive results as \$xxx,xxx. Enter negative results as (\$xxx,xxx)

Holding any qualitative factors aside, which method should be chosen based on this analysis?

## Note: Enter answer as A or B b

California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs \$600,000, has an expected
The equipment falls into the MACRS five-year class for tax depreciation and hence is subject to the following depreciation allowances:

Year Allowance
1 0.2
2 0.32
3 0.19
4 0.12
5 0.11
6 0.06
The hospital's tax rate is 40 percent, and its corporate cost of capital is 10 percent. Assume that the project has average risk.
What is the project's NPV?

\$74,904
Note: Format is \$xx,xxx

## What is the project's IRR?

14.4%
Note: Format is xx.x%
This is a tough and lengthy problem to solve...take your time and think things through. Depreciation, taxes, salvage value and inflation are all in play on this pro
. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 12 percent.

## dget Methods- four ways to make the same type of decisions.

eiod- cost/annual cash flow= payback period in years
unting Rate of Return-
un on investment in percent
nt Value- NPV- neg and pos answer
sent cash flows- cost of project= if neg, not worth it, if pos, you
save money.
nal rare of return
in annuity table, in row that coresponds with year, down to

on
t- salvage value)/ five years

ents--Project X and Project Y. Each project requires a net investment outlay of \$10,000, and the cost of capital for each project is 12 percent. The project's expected net cash
ds involve contracting out for services, and the health outcomes and revenues are not affected by the method chosen. Therefore, the incremental cash flows for the decision a

costs \$600,000, has an expected life of five years and an estimated pre-tax salvage value of \$200,000 at that time. The equipment is expected to be used 15 times a day for
d inflation are all in play on this problem.
ercent. The project's expected net cash flows are as follows:
ncremental cash flows for the decision are all outflows. Here are the projected flows:

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 ne
o 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 X 250 X \$80
r Year 1 are estimated at 15 X 250 X \$80 = \$300,000. Labor and maintenance costs are expected to be \$100,000 during the first year of operation, while utilities will cost ano
r 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 pr
upplies 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 t