Great Lakes Clinic has been asked to provide exclusive healthcare services for next year's World
Exposition. Although flattered 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.
However, the clinic has to pay the organizers of the exposition a fee for the marketing value of the
opportunity. This fee, which must be paid at the end of the second year, is $2 million.
a. What are the cash flows associated with the project that are relevant for capital budgeting purpose?
b. Find the project NPV if its cost of capital is 25 percent and if its cost of capital is 400%.
c. From the results in b, can we conclude what the IRR of this project is? Why or why not?
d. If the project cost capital is 10 percent, what would be the project's NPV in this case?
Shoud the project be undertaken?
ANSWER
a.
Relevant cash flows:
	Year	Cash Flow
	0
	1
	2
b.
NPV @	25%
NPV @	400%
c.