8 5 Assigned Problem 2 6 Great Lakes Clinic has been asked to provide exclusive healthcare services for next year's World 7 Exposition. Although Mattered by the request, the clinic's managers want to conduct a financial analysis of the project. There will be an up-front cost of $160,000 to get the clinic in operation. Then, a net cash inflow of $1 million is expected from operations in each of the two years of the exposition. 10 However, the clinic has to pay the organizers of the exposition a fee for the marketing value of the 11 opportunity. This fee, which must be paid at the end of the second year, is S2 million. 12 13 a. What are the cash flows associated with the project that are relevant for capital budgeting purpose? 14 15 b. Find the project NPV if its cost of capital is 25 percent and if its cost of capital is 400%. 16 Why would a financial calculator give an error message when attempting to calculate this project's IRR? 17 18 c. If the project cost capital is 10 percent, what would be the project's NPV in each case? 19 Shoud the project be undertaken? 20 21 ANSWER 22 a. Cash Flow 0 $160,000 1 $1,000,000 2 -$1,000,000 23 Cash flows: 24 25 Year 26 27 28 29 30 31 32 33 b. 34 NPV @ 25% 35 NPV @ 400% 36 37 15 b. Find the project NPV if its cost of capital is 25 percent and if its cost of capital is 400%. 16 Why would a financial calculator give an error message when attempting to calculate this project's IRR? 17 18 c. If the project cost capital is 10 percent, what would be the project's NPV in each case? 19 Shoud the project be undertaken? 20 21 ANSWER 22 a. 23 Cash flows: 24 25 Year Cash Flow 26 0 $160,000 27 1 $1,000,000 28 2 -$1,000,000 29 30 31 32 33 b. 34 NPV @ 25% 35 NPV a 400% 36 37 38 39 40 41 42 43 c. 44 NPV @ 10% 45