Question

Assume that you are the chief financial officer at Porter Memorial Hospital. The CEO has asked you to analyze 2 proposed capital investments--Project X and Project Y. Each project requires a net investment layout of $10,000 and the cost for each project is 12%. The projects expected net cash flows are as follows?

Calculate each project's payback period, net present value, and internal rate of return

Year	Project X
0	-10000
1	6500
2	3000
3	3000
4	1000

Project Y

-10000

3000

3000

3000

3000

Calculate each project's payback period, net present value, and internal rate of return

Answer 1

		i	ii	iii	iv	v	vi=i*v	vii=ii*v
				Cumulative cash flow			Present value
	Year	Project X	Project Y	Project X	Project Y	PVIF @ 12%	Project X	Project Y
	0	-10000	-10000	-10000	-10000	1	(10,000.00)	(10,000.00)
	1	6500	3000	-3500	-7000	0.89285714	5,803.57	2,678.57
	2	3000	3000	-500	-4000	0.79719388	2,391.58	2,391.58
	3	3000	3000	2500	-1000	0.71178025	2,135.34	2,135.34
	4	1000	3000	3500	2000	0.63551808	635.52	1,906.55
							966.01	(887.95)
ans 1	Payback period
	X	2+500/3000		2.17	year
	Y	3+1000/3000		3.33	year
ans 2	NPV =
	X	966.01
	Y	(887.95)
ans 3	IRR
	X	18.03%
	Y	7.71%
	we can see that project X is better than project Y. Therefore project X should be selected.