Great Lakes Clinic has been asked to provide exclusive healthcare services for t
ID: 2675133 • 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) The cashflows are as follows in the chart below:
Year | Inflow (Outflow)
0 | (160,000)
1 | 1,000,000
2 | 1,000,000
3 | (2,000,000)
b) The IRR is defined as the rate that would equate the cash inflows to the cash outflows. This can be done through trial and error using the net present value calculation for each cashflow, where the IRR is the rate and the NPV equals zero. Using trial and error, the answer can be found to be around 6.26%
NPV = flow / (1+rate)^year
c) Using the same formula as for the last part, but instead using 10% as the rate, the answer is readily found to be $72907.59
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.