Chapter 14 Math Problems

1. Chronic Pain Clinic has estimated the following cash flows associated with a new project. The project cost of capital (discount rate) is 8 percent.

Year Expected Net Cash Flow

0 ($800,000)

1 400,000

2 400,000

3 400,000

What it the projects NPV?

a. $126,897

b. $194,741

*c. $230,839

d. $224,538

e. $246,992

2. Chronic Pain Clinic has estimated the following cash flows associated with a new project. The project cost of capital (discount rate) is 10 percent.

Year Expected Net Cash Flow

0 ($600,000)

1 400,000

2 400,000

3 400,000

What is the projects IRR?

a. 18.5 percent

b. 19.9 percent

c. 20.4 percent

d. 21.8 percent

*e. 44.6 percent

3. Assume a project has the following expected cash flows:

Year Expected Net Cash Flow

0 ($400,000)

1 100,000

2 100,000

3 200,000

4 250,000

4. What is the projects payback (payback period)? 400,000/250,000

a. 2.00 years

b. 2.25 years

c. 2.50 years

d. 2.75 years

*e. 3.15 years

5. Chronic Pain Clinic is considering a capital investment project that is expected to generate $150,000 per year in cash revenues and $78,000 per year in cash operating costs. What is the projects expected net cash flow in Year 1?

*a. $72,000

b. $62,000

c. $150,000

d. -$78,000

e. -$88,000

Explanation: 150000-78000=72000

Chapter 15 Math Problems

1. BestCare HMO is evaluating a new project. It has a coefficient of variation (CV) of 3.2, while the HMOs average project has a CV of 5. The businesss corporate cost of capital is 10 percent, and the typical adjustment for project risk is three percentage points. What is the appropriate project cost of capital?

*a. 7%

b. 10%

c. 13%

d. 16%

e. 19%

2. Merton Medical Clinic managers are analyzing a new project. The projects most likely NPV is $120,000. The project cost of capital (discount rate) is 10 percent.

Probability NPV

0.05 ($700,000)

0.20 ($250,000)

0.50 120,000

0.20 200,000

0.05 300,000

What is the projects Expected NPV?

a. -$300,000

b. $300,485

c. $236,220

d. $281,593

e. *$300,000

3. Merton Clinic managers are analyzing a new project. The projects most likely NPV is $120,000. The project cost of capital (discount rate) is 10 percent.

Probability NPV

0.05 ($800,000)

0.25 200,000

0.50 400,000

0.20 600,000

What is the projects standard deviation?

a. -$300,000

b. $300,485

c. *$291,719

d. $281,593

e. $300,000

4. Merton Clinic managers are analyzing a new project. The projects most likely NPV is $120000. The project cost of capital (discount rate) is 10 percent.

Probability NPV

0.05 ($800,000)

0.25 200,000

0.50 400,000

0.20 600,000

What is the projects coefficient of variation?

a. 1.54

b. 1.85

c. *0.88

d. 0.85

e. 1.00

5. Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities (Prob.):

Year	Prob=0.2	Prob=0.6	Prob=0.2
0	-$100,000	-$100,000	-$100,000
1	20,000	30,000	40,000
2	20,000	30,000	40,000
3	20,000	30,000	40,000
4	20,000	30,000	40,000
5	30,000	40,000	50,000

The Year 5 values include salvage value. Heywoods corporate cost of capital is 10 percent.

What is the projects expected (i.e., base case) NPV assuming average risk? (Hint: The base case net cash flows are the expected cash flows in each year.)

a.-$17,975

*b. $19933

c.$57841

d.-$100,000

e. $50,000

Chapter 14 and 15 Concept Problems

1. Describe the following project breakeven and profitability measures. Be sure to include each measures economic interpretation.

a. Payback

b. Net present value (NPV)

c. Internal rate of return (IRR)

d. Modified Internal Rate of Return (MIRR)

(ii) Critique this statement: NPV is a better measure of project profitability than IRR because NPV leads to better capital investment decisions.

(iii) Briefly define the following cash flow estimation concepts. a. Incremental cash flow b. Cash flow versus accounting income c. sunk cost d. opportunity cost e. changes in current account f. strategic value g. inflation effects

2. (i) Briefly Describe the following analyses and mention their weaknesses and strengths:

1. Sensitivity analysis
2. Scenario Analysis
3. Monte Carlo Simulation

(ii) What is the difference between corporate cost of capital and project cost of capital.

(iii) How is project risk incorporated into a capital budgeting analysis?