The chief operating officer (COO) of a small not-for -profit commuinty hospital
ID: 3143619 • Letter: T
Question
The chief operating officer (COO) of a small not-for -profit commuinty hospital has to maks a recommendaton to the board of trustees on choosing among two project options for an unrestricted gift of $250,000 that has just been received. The board has established a time horizon of 5 years on this project. Interest rate is 6%.
Purchase an upgraded analyzer for the laborstory. Base on forecasts of laboratory utilization, the net cash flow for this project are:
Time Net cash flow
t + 1 $75,000
t + 2 $75,000
t + 3 $50,000
t + 4 $50,000
t + 5 $50,000
Which investment should the COO recommend and why
Explanation / Answer
Investment - $250,000
Net Present value (NPV) - value at t = 0
NPV of investment : $250,000
NPV of cash flow of time t+1 : $75,000 / (1+0.06)
NPV of cash flow of time t+2 : $75,000 / (1+0.06)2
...
NPV of cash flow of time t+5 : $75,000 / (1+0.06)5
so in total over 5 years, the investment made $315,927 - $250,000 = $65,927.
Which makes this a good investment.
1 $70,755 2 $66,750 3 $62,971 4 $59,407 5 $56,044 total $315,927Related Questions
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