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1. 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? And why?
Great Lakes Clinic has been asked to provide exclusive healthcare services for next year’s world exposition. Although flattered by the request, the clinic managers want to conducts a financial analysis of the project. There will be an up-front cost of $160,000 to get the clinic in operation. Then a net cash inflow of $1 million is expected from operations in each of the two years of the exposition. However the clinic has to pay the organizers of the exposition a fee for the marketing value of the opportunity. This fee, which must be paid at the end of the second year, is $2 million.
a. What are the cash flows associated with the projects?
b. What is the project’s IRR?
c. Assuming a project cost of capital of 10 percent, what is the project’s NPV?
3. Assuming that you are the chief financing officer at Porter Memorial Hospital, the CEO has asked you to analyzed two proposed capital investments, 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 flows are as follows:
Year Project X Project Y
0 ($10,000) ($10,000)
1 6,500 3,000
2 3,000 3,000
3 3,000 3,000
4 1,000 3,000
a. Calculate each projects payback period, net present value (NPV) and internal rate of return (IRR)
b. Which project or projects is financially acceptable? Explain your answer
4. The director of capital budgeting for Big Sky Health System, Inc. has estimated the following cash flows in thousands of dollars for a proposed new service:
Year Expected Net Cash Flow
The project’s cost of capital I 10 percent
a. What is the project’ payback period?
b. What is the project’s NPV?
c. What is the project’s IRR? And it’s MIRR?