Chapter 11 - Capital Budgeting Winston Clinic is evaluating a project that costs $52,125 and has expected net cash flows 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. a. What is the project's payback? b. What is the project's NPV? Its IRR? c. Is the project financially acceptable? Explain your answer. Here is a table of cash flows for the project: Year 1 3 Annual Cumulative Cash Flow Cash Flow -$52,125 -$52, 125 $12,000 -$40,125 $12,000 -$28,125 $12,000 -$16,125 $12,000 -$4,125 $12,000 $7,875 $12,000 $19,875 $12,000 $31,875 $12,000 $43,875 5 6 7 8 Spreadsheet solution: Payback NPV IRR Chapter 11 - Capital Budgeting 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 0 Project A -$1,500,000 $500,000 $1,000,000 $2,000,000 Project B -$1,500,000 $2,000,000 $1,000,000 $600,000 2 a. What is each project's IRR? b. What is each project's NPV if the cost of capital is 10 percent? Spreadsheet solution: Project A IRR NPV 10% Project B IRR NPV 10%