| Capitol Health Plans, Inc., is evaluating two different methods for providing home health services to its | ||||||||
| members. Both methods 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 are all outflows. | ||||||||
| Here are the projected flows: | ||||||||
| 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 | ||||||
| a. What is each alternative's IRR? | ||||||||
| b. If the cost of capital for both methods is 9 percent, which method should be chosen? Why? | ||||||||
| Year | Method A | Method B |
| 0 | (3,00,000) | (1,20,000) |
| 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 |
| IRR (part a) | 3.26% | 75.15% |
| NPV (part b) | (43,283.02) | 2,53,406.52 |
Note: IRR & NPV calculated using IRR & NPV functions.
Formulas:
IRR function: =IRR(CF0,CF1,CF2,CF3,CF4,CF5)
NPV function: =NPV(9%,CF1,CF2,CF3,CF4) + CF0
Get Answers For Free
Most questions answered within 1 hours.