Question
In: Finance
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.
Solutions
jeff jeffy answered 6 months agoRelated Solutions
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