Assume you are the CFO at Porter Memorial Hospital. The CEO has asked you to ana

Question

Assume you are the CFO at Porter Memorial Hospital. The CEO has asked you to analyze 2 proposed capital investments- Project X and Project Y. Each project requires a net investment outlay of $ 10,000, and the oppurtunity cost of capital for each project is 12%. The projects exp[ected net cash flows are as follows.

Year           Ptoject 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 project's payback, NPV and IRR.

b. Which project or porjects is financially acceptable. Explain your answer.

Explanation / Answer

Rate of return 12% Project X 1 2 3 4 Year 0 Year 1 Year 2 Year 3 Year 4 Cashflow -10000 6500 3000 3000 1000 Discounted @12% to PV -10000 5803.571 2391.582 2135.341 635.5181 NPV 966.01 IRR 5.386% Project Y 1 2 3 4 Year 0 Year 1 Year 2 Year 3 Year 4 Cashflow -10000 3000 3000 3000 3000 Discounted @12% to PV -10000 2678.571 2391.582 2135.341 1906.554 NPV -887.952 IRR -3.83% So project X is financially acceptable as its NPV and IRR are positive whereas Project Y has negative NPV and IRR

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