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homework for my cfa class at Carnegie melon

- Investment Decision Rules
- 48776941-Capital-Expenditure.ppt
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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.

cash flow*annuity factor=added pres

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

collum of decimal answer.

Note: format is xx.x% 16.0%

(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

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

$966

What is the NPV for Project Y?

($888)

Note: Format is $x,xxx if positive; ($x,xxx) if negative.

18.03%

What is the IRR for Project Y?

7.71%

Note: Format is xx.xx% if positive; -xx.xx% if negative.

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

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.

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

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

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.

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.

*annuity factor=added present cash flows

nal rare of return

invested/net cash flows= decimal answer

in annuity table, in row that coresponds with year, down to

decimal answer.

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

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