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Assume that you are the CFO at Methodist Hospital in San Antonio. The CEO has asked you to analyze two proposed capital investments: Project X
Assume that you are the CFO at Methodist Hospital in San Antonio. The CEO has asked you to | |||||||
analyze two proposed capital investments: Project X and Project Y. Each project requires a net | |||||||
investment outlay of $10,000, and the cost of capital for each project is 12 percent. The project's expected | |||||||
net cash flows are as follows: | |||||||
Year | Project X | Project Y | NPV | ||||
0 | -$11,000 | -$11,000 | |||||
1 | $7,000 | $3,000 | |||||
2 | $3,000 | $3,000 | |||||
3 | $3,000 | $4,000 | |||||
4 | $1,000 | $4,000 | |||||
a. Calculate each project's payback period, net present value (NPV), and internal rate of return (IRR). | |||||||
b. Which project (or projects) is financially acceptable? Explain your answer. | |||||||
a. Complete the table below, solving for the project's cash flows, paybacks, NPVs (at 12 percent), and IRRs. | |||||||
Project X | Project X | Project Y | Project Y | ||||
Annual | Cumulative | Annual | Cumulative | ||||
Year | Cash Flow | Cash Flow | Cash Flow | Cash Flow | |||
0 | |||||||
1 | |||||||
2 | |||||||
3 | |||||||
4 | |||||||
Payback | |||||||
NPV | |||||||
IRR | |||||||
b. Which project (or projects) is financially acceptable? Explain your answer. | |||||||
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