Jennie loves the advice you have been giving her! She is now determining if she should invest in opening a new dental clinic to cater to the growing demand for dental services.  To start the clinic, Jennie thinks he will need to immediately invest in $20,000 of computer equipment and $2.4M of specialized dental imaging equipment costing $2.4M. Both assets depreciate at a rate of 30%. Assume that the dental imaging machine will be sold for $1.4M when the business is closed (in two years). The computer equipment will be worthless at that time. The clinic will charge $60 per scan and the company expects to do 3,800 scans in the first year and 4,100 in the second year.  Operating cash flows as a percentage of sales are expected to be 75% in the first year and 80% in the second year. ?

Assume that all revenues (and expenses) occur at the end of the year. The tax rate is 40% and the cost of capital is 10%. 

 Requirment:

(a) Should Jennie invest in the dental clinic?  Why? Please base your answer on your estimate of the NPV of the investment.  Please provide a clear concluding statement that summarizes your result.?

 

(b) Jennie has heard about something called the Internal Rate of Return (IRR).  She wants to know if the IRR for this project is greater than, less than or equal to 10% for this project?  How do you know? 

 

 

(c) Jennie wonders, if the cost of capital was 15% instead of 10%, should she invest?  Why or why not?