The director of capital budgeting for Big Sky Health Systems, Inc., has estimate

Question

The director of capital budgeting for Big Sky Health Systems, Inc., has estimated the following cash flows in thousands of dollars for a proposed new service: Year:0,1,2,3 Expected Net Cash Flow ($100), 70, 50, 20 (a)The project's cost of capital is 10 percent. (b) The project's NPV is $19,984.97 (c) The project's IRR is 24%. Its MIRR is 17%. what would you recommen if there was an opportunity cost involved of $15,000 (total) in today's dollars obtained by renting the space involved int he new service to an outside entity for 3 years? why or why not?

Explanation / Answer

Even after considering the opportunity cost of renting the space in today’s dollars the net present value of project would be greater than the zero ($19,984.97 - $15,000), which means the internal rate of return would be more than the cost of capital. Thus, the firm should accept the project and go for investing in new service.

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