UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 11 -- Capital Budgeting

PROBLEM 5

Assume that you are the CFO at Porter Memorial Hospital. The CEO has asked you to analyze two proposed capital investments: Project X and Project Y. Each project requires a net investment outlay of $10,000, and the cost of capital for each project is 12 percent. The project's expected net cash flows are as follows:

Year Project X Project Y 0 -$10,000 -$10,000 1 $6,500 $3,000 2 $3,000 $3,000 3 $3,000 $3,000 4 $1,000 $3,000 a. Calculate each project's payback period, net present value (NPV), and internal rate of return (IRR). b. Which project (or projects) is financially acceptable? Explain your answer. ANSWER