. The Staff of Jefferson Medical Services has estimated the following net cash f
ID: 2690910 • Letter: #
Question
. The Staff of Jefferson Medical Services has estimated the following net cash flows for a food services operation that it may open in its outpatient clinic: Year Expected net cash flow 0 ($100,000) Year1 30,000___ 2year 30,000___ 3year 30,000___ 4year 30,000_____ 5year 30,000_____ 5(salvage value) 20,000__ The Year o cash flow is the net investment outlay, while the final amount is the terminal cash flow. ___(The clinic is expected to move to a new building in five years.) All other flows represent net operating cash flows. Jefferson
Explanation / Answer
a.
cf(0) = -$100,000
cf(1) = 30,000
cf(2) = 30,000
cf(3) = 30,000
cf(4) = 30,000
cf(5) = 30,000+salvage value = 50,000
100000 = 30000*(1/(1+irr) + 1/(1+irr)^2+ 1/(1+irr)^3+ 1/(1+irr)^4)+ 50000*1/(1+irr)^5)
irr = 19.05%
b.
NPV = -100000 + 30000*(1/1.1 + 1/1.1^2+ 1/1.1^3+ 1/1.1^4) + 50000*1/1.1^5
= $26,142.03
c.
worst case:
cf(0) = -$100,000
cf(1) = 20,000
cf(2) = 20,000
cf(3) = 20,000
cf(4) = 20,000
cf(5) = 20,000+salvage value = 20,000
100000 = 20000*(1/(1+irr) + 1/(1+irr)^2+ 1/(1+irr)^3+ 1/(1+irr)^4)+ 20000*1/(1+irr)^5)
irr = 0
NPV = -100000 + 20000*(1/1.1 + 1/1.1^2+ 1/1.1^3+ 1/1.1^4) + 20000*1/1.1^5
= $24,184.26
best case:
cf(0) = -$100,000
cf(1) = 40,000
cf(2) = 40,000
cf(3) = 40,000
cf(4) = 40,000
cf(5) = 40,000+salvage value = 70,000
100000 = 40000*(1/(1+irr) + 1/(1+irr)^2+ 1/(1+irr)^3+ 1/(1+irr)^4)+ 70000*1/(1+irr)^5)
irr = 32.64%
NPV = -100000 + 40000*(1/1.1 + 1/1.1^2+ 1/1.1^3+ 1/1.1^4) + 70000*1/1.1^5
= $70,259.11
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