3. Great Lakes Clinic has been asked to provide exclusive healthcare services fo

Question

3. Great Lakes Clinic has been asked to provide exclusive healthcare services for the World Exposition. 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 $1,500,000 to get the clinic in operation. Then, a set of net cash inflows of $0.5 million, $1 million, and $3 million are expected from operations in the following three 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 third year, is $1 million. (Hint: the Year 3 cash flow is the sum of the operating inflow and the fee paid to the organizer.) a. What are the cash flows associated with the project? b. What is the project's IRR? c. What is the project’s NPV if the opportunity cost of capital is 10 percent? 5 percent? 15 percent?

Explanation / Answer

Year 0 Year1 Year2 Year3 Set of net cash inflows -1.5 0.5 1 3 Fee -1 Net cash flow -1.5 0.5 1 2 Cash flow associated with project(-1.5+.5+1+2) 2 Million IRR 43.97% NPV 10% in Million 1.28 NPV 5% in Million 1.61 NPV 15% in Million 1.01

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