Question

Seabreeze Clinic is evaluating a project that costs $148,000 and has expected net cash inflows of...

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.

Homework Answers

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.

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