Jan Boothe is the CFO of the Laurelwood Sports Medicine Clinic. Boothe is trying to determine whether or not the clinic should move patient files and other items out of a spare room in the clinic and use the room for physiotherapy work. She has determined that it would require an investment of $$286,000$ for equipment and related costs of getting the room ready for use. Based on receipts being generated from other rooms in the clinic, Boothe estimates that the new room would generate a net cash inflow of $$70,000$ per year. The equipment purchased for the room would have a seven$-$year estimated useful life.

Required:

$($Ignore income taxes.$)$

$1.$ Compute the IRR on the equipment for the new room to one decimal place. Verify your answer by computing the net present value of the equipment using the IRR you have computed as the discount rate. $($Hint: Use Microsoft Excel to calculate the discount factor$($s$).)($Do not round intermediate calculations and PV factor. Round the final answers to the nearest whole dollar. Negative amount should be indicated by a minus sign.$)$

$2.$ Assume that Boothe will not purchase the new equipment unless it promises a return of at least $14\%.$ Compute the amount of annual cash inflow that would provide this return on the $$286,000$ investment. $($Hint: Use Microsoft Excel to calculate the discount factor$($s$).)($Do not round intermediate calculations and PV factor. Round the final answers to the nearest whole dollar.$)$

$3-$a$.$ Although seven years is the average life for physiotherapy equipment, Boothe knows that due to changing technology this life can vary substantially. Compute the IRR to one decimal place if the life of the equipment were $($a$)$ five years and $($b$)$ nine years, rather than seven years. $($Hint: Use Microsoft Excel to calculate the discount factor$($s$).)($Do not round intermediate calculations and round your final answers to the nearest whole number.$)$

$3-$b$.$ Is there any information provided by these computations that you would be particularly anxious to show Boothe?

multiple choice

Yes

No

$4.$ Boothe is unsure about the estimated $$70,000$ annual cash inflow from the room. She thinks that the actual cash inflow could be as much as $15\%$ greater or less than this figure.

a$.$ Assume that the actual cash inflow each year is $15\%$ greater than estimated. Recompute the IRR to one decimal place using the seven$-$year life. $($Hint: Use Microsoft Excel to calculate the discount factor$($s$).)($Do not round intermediate calculations and round your final answers to the nearest whole number.$)$

b$.$ Assume that the actual cash inflow each year is $15\%$ less than estimated. Recompute the IRR to one decimal place using the seven$-$year life. $($Hint: Use Microsoft Excel to calculate the discount factor$($s$).)($Do not round intermediate calculations and round your final answers to the nearest whole number.$)$

$5.$ Refer to the original data. Assume that the equipment is purchased and that the room is opened for use. However, due to an increasing number of physiotherapists in the area, the clinic is able to generate only $$60,000$ per year in net cash receipts from the new room. At the end of five years, the clinic closes the room and sells the equipment to a company for a cash price of $$120,000.$ Compute the IRR to one decimal place that the clinic earned on its investment over the five$-$year period. $($Hint: Use Microsoft Excel to calculate the discount factor$($s$).$ A useful way to proceed is to find the discount rate that will cause the net present value of the investment to be equal to$,$ or near, zero$).($Do not round intermediate calculations and round your final answers to the nearest whole number.$)$