Finance Market

1 Winston Clinic is evaluating a project that costs $52,125 and has expected net cash inflows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 12 percent.


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a What is the project’s payback

b. What is the project’s NPV? Its IRR? Its MIRR


c. Is the project financially acceptable? Explain your answer

2 Better Health, Inc., is evaluating two investment projects, each of which requires an up-front expenditure of $1.5 million. The projects are expected to produce the following net cash inflows:




Year                                           Project A                                 Project B


1                                                  $500,000                             $2,000,000


2                                                 1,000,000                               1,000,000


3                                                 2,000,000                                  600,000

a What is each project’s IRR




b What is each project’s NPV if the cost of capital is 10 percent? 5 percent? 15 percent?






4The managers of Merton Medical Clinic are analyzing a proposed project. The project’s most likely NPV is $120,000, but as evidenced by the following NPV distribution, there is considerable risk involved:




Probability                                                    NPV


0.05                                                            ($700,000)


0.20                                                              (250,000)


0.50                                                               120,000


0.20                                                               200,000


0.05                                                               300,000






a What are the project’s expected NPV and standard deviation of NPV




b Should the base case analysis use the most likely NPV or the expected NPV? Explain your answer.