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# UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT 5/1/10 Chapter 11 -- The Basics of Capital Budgeting PROBLEM 1 Winston Clinic is evaluating a project

I just need the last question, question 16 answered on the spreadsheet

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT 5/1/10 Chapter 11 -- The Basics of Capital Budgeting PROBLEM 1 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. ANSWER Year Cash flow Cumulative cash flows 0 -52125 -52125 1 12000 -40125 2 12000 -28125 3 12000 -16125 4 12000 -4125 5 12000 7875 6 12000 19875 7 12000 31875 8 12000 43875 Payback = 4.34375 years NPV = 7486.68 IRR = 16.00% Yes, the project should be accepted
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 11 -- The Basics of Capital Budgeting PROBLEM 2 Better Health, Inc. is evaluating two investment projects, each of which requires an up-front expenditure of \$1.5 million. The projects are expected to produce the following net cash inflows: Year Project A Project B 0 -\$1,500,000 -\$1,500,000 1 \$500,000 \$2,000,000 2 \$1,000,000 \$1,000,000 3 \$2,000,000 \$600,000 a. What is each project's IRR? b. What is each project's NPV if the cost of capital is 10 percent? 5 percent? 15 percent? ANSWER IRR = 43.97% 82.03% NPV @ 10% 1283621.34 1595416.98 NPV @ 5% 1610895.15 1830093.94 NPV @ 15% 1005958.74 1389783.84 Project B should be accepted as it has higher NPV
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UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT 5/1/10 Chapter 11 -- The Basics of Capital Budgeting
PROBLEM 1
Winston Clinic is evaluating a project that costs \$52,125 and has expected net cash...

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