Stumptown Health is evaluating a five-year contract to open a primary care clinic on the campus...

Stumptown Health is evaluating a five-year contract to open a primary care clinic on the campus of a local employer. You are given the following information: The initial cost of opening the clinic is $100,000. After that, expected net operating cash flows equal $30,000 per year. The estimated salvage value of the clinic is $20,000. The estimated discount rate is 10%.

a. Calculate the estimated return on investment (in dollars). Should Stumptown open the clinic? Provide a one-sentence justification for your answer.

b. Now assume that there could be some error in the estimated values. The net operating cash flows could be as low as $20,000 or as high as $40,000. Furthermore, the salvage value could be as low as $0 or as high as $30,000. Calculate the estimated return on investment (in dollars) under both the worst-case and best-case scenarios. Under each scenario, should Stumptown open the clinic? Provide a one-sentence justification for your answer.

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jeff jeffy answered 1 month ago

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