Max Baldwin is wondering whether he made the right decision four years ago. As the president of

Question:

Max Baldwin is wondering whether he made the right decision four years ago. As the president of Baldwin Health Care Services, he acquired a hospital specializing in elder care with an initial cash investment of $2,800,000. Mr. Baldwin would like to know whether the hospital's financial performance has met the original investment objective. The company's discount rate (required rate of return) for present value computations is 14 percent. Expected and actual cash flows follow.

Year 4 Year 1 Year 2 Year 3 $920,000 800,000 Expected Actual $1,000,000 1,280,000 $1,200,000 1,400,000 $960,000 760,000

Required
a. Compute the net present value of the expected cash flows as of the beginning of the investment.
b. Compute the net present value of the actual cash flows as of the beginning of the investment.
c. What do you conclude from this postaudit?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...