ey Care Medical Center expects Projects X and Y to generate the following cash f
ID: 2521284 • Letter: E
Question
ey Care Medical Center expects Projects X and Y to generate the following cash flows: Givens (in '000s) Years o 2 4 5 1 Initial investment 2 Net operating cash flows for Project X 3 Net operating cash flows for Project Y ($7,500) $7,000 $5,000 $3,000 $2,000 $1,500 $1,500 $2,000 $3,000 $5,000 $7,000 a. b. c. Determine the NPV for both projects using a cost of capital of 17 percent. Determine the NPV for both projects using a cost of capital of 12 percent. At a 12 percent discount rate, which project should be accepted? At a 17 percent discount rate, which project should be accepted? Explain.Explanation / Answer
a.
Project X
Year
Cash Flow(C)
PV Factor Calculation
PV Factor @ 17% (F)
PV (= C x F)
0
$ (7,500)
1/(1+0.17)^0
1
$ (7,500.00)
1
$ 7,000
1/(1+0.17)^1
0.854700855
$ 5,982.91
2
$ 5,000
1/(1+0.17)^2
0.730513551
$ 3,652.57
3
$ 3,000
1/(1+0.17)^3
0.624370556
$ 1,873.11
4
$ 2,000
1/(1+0.17)^4
0.533650048
$ 1,067.30
5
$ 1,500
1/(1+0.17)^5
0.456111152
$ 684.17
NPV
$ 5,760.05
Project Y
Year
Cash Flow(C)
PV Factor Calculation
PV Factor @ 17% (F)
PV (= C x F)
0
$ (7,500)
1/(1+0.17)^0
1
$ (7,500.00)
1
$ 1,500
1/(1+0.17)^1
0.854700855
$ 1,282.05
2
$ 2,000
1/(1+0.17)^2
0.730513551
$ 1,461.03
3
$ 3,000
1/(1+0.17)^3
0.624370556
$ 1,873.11
4
$ 5,000
1/(1+0.17)^4
0.533650048
$ 2,668.25
5
$ 7,000
1/(1+0.17)^5
0.456111152
$ 3,192.78
NPV
$ 2,977.22
b.
Project X
Year
Cash Flow(C)
PV Factor Calculation
PV Factor @ 12% (F)
PV (= C x F)
0
$ (7,500)
1/(1+0.12)^0
1
$ (7,500.00)
1
$ 7,000
1/(1+0.12)^1
0.892857143
$ 6,250.00
2
$ 5,000
1/(1+0.12)^2
0.797193878
$ 3,985.97
3
$ 3,000
1/(1+0.12)^3
0.711780248
$ 2,135.34
4
$ 2,000
1/(1+0.12)^4
0.635518078
$ 1,271.04
5
$ 1,500
1/(1+0.12)^5
0.567426856
$ 851.14
NPV
$ 6,993.49
Project Y
Year
Cash Flow(C)
PV Factor Calculation
PV Factor @ 12% (F)
PV (= C x F)
0
$ (7,500)
1/(1+0.12)^0
1
$ (7,500.00)
1
$ 1,500
1/(1+0.12)^1
0.892857143
$ 1,339.29
2
$ 2,000
1/(1+0.12)^2
0.797193878
$ 1,594.39
3
$ 3,000
1/(1+0.12)^3
0.711780248
$ 2,135.34
4
$ 5,000
1/(1+0.12)^4
0.635518078
$ 3,177.59
5
$ 7,000
1/(1+0.12)^5
0.567426856
$ 3,971.99
NPV
$ 4,718.59
c.
At 12 % discount rate Project X should be accepted as the NPV of Project X is higher than Project Y.
At 17 % discount rate Project X should be accepted as the NPV of Project X is higher than Project Y.
Project X
Year
Cash Flow(C)
PV Factor Calculation
PV Factor @ 17% (F)
PV (= C x F)
0
$ (7,500)
1/(1+0.17)^0
1
$ (7,500.00)
1
$ 7,000
1/(1+0.17)^1
0.854700855
$ 5,982.91
2
$ 5,000
1/(1+0.17)^2
0.730513551
$ 3,652.57
3
$ 3,000
1/(1+0.17)^3
0.624370556
$ 1,873.11
4
$ 2,000
1/(1+0.17)^4
0.533650048
$ 1,067.30
5
$ 1,500
1/(1+0.17)^5
0.456111152
$ 684.17
NPV
$ 5,760.05
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