Great Lakes Clinic has been asked to provide exclusive healthcare services for t
ID: 1232897 • Letter: G
Question
Great Lakes Clinic has been asked to provide exclusive healthcare services for the 2003-2004 WorldExposition. Although flattered by the request, the clinic's managers want to conduct 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 project?
b. What is the project's IRR?
c. Assuming a project cost of capital of 10 percent, what is the project's NPV?
Explanation / Answer
a. Cash flows Year 0 Year 1 Year 2 -$160,000 $1,000,000 $1,000,000 - $2,000,000 = -$1,000,000 b. NPV= 0 for IRR -$160,000 + $1,000,000/(1+r) -$1,000,000/(1+r)^2 =0 IRR =25.00% c. r=10% NPV = -$160,000 + $1,000,000/(1.1) -$1,000,000/(1.1)^2 =-$77,355.3719
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