Question

Seabreeze Clinic is evaluating a project that costs $148,000 and has expected | ||||||||

net cash inflows of $45,000 per year for six years. (Round answers to 2 decimal places.) | ||||||||

The cost of capital is 10%. | ||||||||

a. | What is the project's payback? | |||||||

b. | What is the project's NPV? | |||||||

c. | What is the project's IRR? | |||||||

d. | Should the clinic adopt the project? Explain why or why not. |

Answer #1

Initial Investment = $148,000

Annual Net Cash Inflows = $45,000

Life of Project = 6 years

Cost of Capital = 10%

Answer a.

Payback Period = Initial Investment / Annual Net Cash
Inflows

Payback Period = $148,000 / $45,000

Payback Period = 3.29 years

Answer b.

Net Present Value = -$148,000 + $45,000/1.10 + $45,000/1.10^2 +
$45,000/1.10^3 + $45,000/1.10^4 + $45,000/1.10^5 +
$45,000/1.10^6

Net Present Value = -$148,000 + $45,000 * (1 - (1/1.10)^6) /
0.10

Net Present Value = -$148,000 + $45,000 * 4.355261

Net Present Value = $47,986.75

Answer c.

Answer d.

Clinic should adopt this project as its NPV is positive and IRR is higher than cost of capital.

PROBLEM 2
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 after the
cost outflow, and the project has a cost of
capital of 12 percent.
a. What is the project's payback?
b. What is the project's NPV? Its IRR?
c. Is the project financially acceptable? Explain your
answer.

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