Question

Senior management has asked you, as a department manager, to evaluate 2 potential products for implementation at JCC Hospital. The hospital has provided $10,000 funding for the project and, in compliance with the board of director’s direction for a minimum return of 12%, will only accept a project meeting, or exceeding, this requirement. You best friend, the hospital controller, has helped to develop the projected cash flows for both the addition of a new patient service (option A) and a refurbishment of an existing CT scanner:

Year	Option A	Option B
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

1. Addresses at least 3 capital budget measures (payback period, NPV, IRR, etc.) based on the hurdle rate.
2. Present what you believe to be the major advantages and potential risks for implementing a new service or refurbishing an existing asset.

Answer 1

	Nominal			Present Value
Particulars	Option A	Option B	PV Factor	Project M	Project N
Initial Cost	-10000	-10000	1.00	-10,000	-10,000
Year-1	6500	3000	0.89	5,804	2,679
Year-2	3000	3000	0.80	2,392	2,392
Year-3	3000	3000	0.71	2,135	2,135
Year-4	1000	3000	0.64	636	1,907
Total Cash Flow	3500	2000	NPV	966	-888
Payback Period	2 Years 2 Months	3 Years 4 Months
IRR	18.03%	7.71%

It is advisable to take Project A

The major advantage is In new one is we have positive cash flows and it is generating the cash flows in positive way.