Please show all work. Assume that you are the chief financial officer at Porter

Question

Please show all work.

Assume that you are the chief financial officer at Porter Memorial Hospital. The CEO has asked you to analyze 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 projects 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.

Explanation / Answer

a. Payback Period of Project X:

Payback Period = 2+(500/3000)

=2.167 years

Payback period for Project Y:

Payback period = 3+(1000/3000)

=3.33 years

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NPV of Project X:

NPV = -10000+5083.57+2391.58+635.52

=$966.01

NPV of Project Y:

NPV = -10000+2678.57+2391.58+2135.34+1906.55

=$-887.95

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IRR of project X:

IRR of Project Y:

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b. Project X is finacially viable because the NPV of the project is positive

Year Cash Flow Cumulative Cash Flow 0 -10000 -10000 1 6500 -3500 2 3000 -500 3 3000 2500 4 1000 3500

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