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Cox Healthcare Clinic is evaluating a Capital Budgeting project that costs $52,125 and has expected net...

Cox Healthcare Clinic is evaluating a Capital Budgeting project that costs $52,125 and has expected net cash flows of $12,000 per year for eight years. The first inflows occur one year after the cost outflow and the project has a cost of capital of 12 percent.

Below is a table of cash flows for the Capital Budget project:

Year Annual Cash Flow Cumulative Cash Flow
0 -$52,125 -$52,125
1 $12,000 -$40,125
2 $12,000 -$28,125
3 $12,000 -$16,125
4 $12,000 -$4,125
5 $12,000 $7,875
6 $12,000 $19,875
7 $12,000 $31,875
8 $12,000 $43,875

QUESTIONS: Answer and Respond to the Following. Please show your work.

  1. What is the project's payback?
  2. What is the project's NPV?
  3. What is the IRR?
  4. Is the project financially acceptable? Explain your answer.

Solutions

Expert Solution

Project
Year Cash flow stream Cumulative cash flow
0 -52125 -52125
1 12000 -40125
2 12000 -28125
3 12000 -16125
4 12000 -4125
5 12000 7875
6 12000 19875
7 12000 31875
8 12000 43875
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 4 and 5
therefore by interpolation payback period = 4 + (0-(-4125))/(7875-(-4125))
4.34 Years
Accept project as payback period is less than last project cashflow
Project
Discount rate 0.12
Year 0 1 2 3 4 5 6 7 8
Cash flow stream -52125 12000 12000 12000 12000 12000 12000 12000 12000
Discounting factor 1 1.12 1.2544 1.404928 1.5735194 1.762342 1.973823 2.210681 2.475963
Discounted cash flows project -52125 10714.29 9566.327 8541.363 7626.2169 6809.122 6079.573 5428.191 4846.599
NPV = Sum of discounted cash flows
NPV Project = 7486.68
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Accept project as NPV is positive
Project
IRR is the rate at which NPV =0
IRR 0.159988635
Year 0 1 2 3 4 5 6 7 8
Cash flow stream -52125 12000 12000 12000 12000 12000 12000 12000 12000
Discounting factor 1 1.159989 1.345574 1.56085 1.8105684 2.100239 2.436253 2.826026 3.278158
Discounted cash flows project -52125 10344.93 8918.13 7688.118 6627.7529 5713.636 4925.597 4246.246 3660.592
NPV = Sum of discounted cash flows
NPV Project = 6.17392E-05
Where
Discounting factor = (1 + IRR)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
IRR= 16%
Accept project as IRR is more than discount rate

jeff jeffy answered 7 months ago
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