I am having a hard time calculating problems 3 through 5. I would like help understanding the equation that way I will be able to solve.

Chapter 9 Homework Each homework assignment is intended to assist you in learning material that is essential for your success not only in this class but in your chosen career. As such you should approach each assignment with the intent to learn. Please answer each question as completely as you can. Show all relevant work. If you use any figures or graphs to answer the question, please make sure they are labeled clearly. Remember, the quality of your answer's explanation is as important as the correctness of the answer. You are to submit this homework to the digital drop box no later than Sunday at 11:59 p.m. CT. 1. What is capital investment analysis? Why are capital investment decisions so important to businesses? It is a budgeting procedure that companies and agencies use to assess the potential profitability of a long-term investment. Capital investment analysis assesses long-term investments, which might include fixed assets like equipment, machinery, or real estate. There are four steps involve: 1). Cash flow estimation: It estimates the project's cash flows. This estimation takes into consideration the initial cost, the cash flow that arise from operating the project, and the cash flows that is associated with closing down the project at the end of its useful life. 2). Project rule assessment: Assess the riskiness of the cash flows. 3). Cost of capital estimation: It estimate the project cost. If the project being evaluated does not have average risk, the corporate cost of capital must be adjusted to obtain the project cost of capital. 4). Financial impact assessment. It assess the project's financial merit. Several measures can be used for the purpose. Capital investment decisions are important to businesses because it provide the framework for evaluating, classifying, and ranking both mutually exclusive and independent long-term investments. It enables you to determine the most appropriate investments; this is picking a choice from various compelling investments. This way you are able to allocate your scarce financial resources according to the priority of different investment proposals. a. What is the purpose of placing capital investments into categories, such as mandatory replacement, or expansion of existing products, services, or markets? Capital investments are placed in categories, because certain projects required detailed analysis and warrant the approval of senior management or others. Cost also play a major role in the category, because the costlier the project the more detailed the analysis. A project that cost $5 million will take the full board of directors to give final approval, while a $4,000 project could be the budget authorize for a department. b. Should financial analysis play the dominant role in capital investment decisions? Explain your answer. Yes. Financial analysis give managers relevant information about capital investment's financial impact, allowing them to make better decisions whether to accept a profit that is not financially viable. Having the information ahead of time will not leave any room for surprises. c. What are the four steps of capital investment financial analysis? The four steps of capital investment financial analysis are: (1). Cash flow estimation 2). (2). Project risk assessment (3). Cost of capital estimation (4). Financial impact assessment. 2. Describe the following project breakeven and profitability measures. Be sure to include each measure's economic interpretation. a. Payback It is the number of years that it takes to recover the cost of an investment. Payback occurs when the cumulative cash flow turn positive. The shorter the payback, the better as the business will recover its investment in the project. b. Net present value (NPV) Net present value (NPV) is a dollar return on investment (ROI) measure that uses discounted cash flow (DCF) analysis, hence the name DCF profitability measure. It is interpreted by: Finding the present values: Present( Time 0) value of each cash flow, which includes both inflows and outflows, when discounted at the opportunity cost of capital. Sum the present value : The result is defined as the project's NPV, because it is the sum, or net of the present vales of an investment's expected cash flows. Interpret the NPV: If there is a positive NPV, the project is expected to be profitable, as the higher the NPV the more profitable the project. When the NPV is zero, it is considered break even economically. If there is a negative NPV the project is expected to be unprofitable. c. Internal rate of return (IRR) It is a process use to measure a project's percentage profitability (its expected rate of return). When the IRR is computed it is done as the discounted rate that equates the present value of the project's expected cash flows to the investment overlay. It is what forces the NPV of the project to be zero. 3. Consider the following net cash flows: Year Cash Flow 1 $ 0 2 $250 3 $400 4 $500 5 $600 5 $600 What is the net present value if the opportunity cost of capital (discount rate) is 10 percent? Add an outflow (or cost) of $1,000 at Year 0. Now, what is the net present value? 4. Better Health Inc. is evaluating two capital investments, each of which requires an up-front (Year 0) expenditure of $1.5 million. The projects are expected to produce the following net cash inflows: Year Project A Project B 1 $500,000 $2,000,000 2 $1,000,000 $1,000,000 3 $2,000,000 $600,000 a. What is each project's IRR? b. What is each project's NPV if the opportunity cost of capital is 10 percent? 5 percent? 15 percent? 5. Assume that you are the chief financial officer at Porter Memorial Hospital. The CEO has asked you to analyze two proposed capital investmentsProject X and Project Y. Each project requires a net investment outlay of $10,000, and the opportunity cost of capital for each project is 12 percent. The projects' expected net cash flows are as follows: Year 0 1 2 3 4 Project X ($10,000) $6,500 $3,000 $3,000 $1,000 Project Y ($10,000) $3,000 $3,000 $3,000 $3,000 a. Calculate each project's payback, NPV, and IRR. b. Which project (or projects) is financially acceptable? Explain your