Question

a certain hospital is considering setting up a new facility. Management estimates that it will cost $1.5 million to purchase the necessary equipment and renovate the building to support its long term care services. The projected net cash flows generated by the new facility over the next five years are given below:

Year 1 -0

Year 2 $380,000

Year 3 $400,000

Year 4 $420,000

Year 5 $440,000

Assuming a five year life and 8% cost of capital, compute the net present value of this proposal. On the merits of your net present value computation, should this hospital invest in this project?

Answer 1

Solution :

The net present value of this proposal is = - $ 248,509.21

As per the NPV Rule or Criteria for evaluating a project’s acceptability

1. If the NPV of the project is Positive i.e., greater than zero, the Project should be accepted.

A positive NPV implies the project has recovered its Initial Investment value.

2. If the NPV of the project is Negative i.e., less than zero, the Project should be rejected.

A negative NPV implies the project has not been able to recover its Initial Investment value.

The net present value of the proposal is negative or less than zero. Hence, the hospital should not invest in this project

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.