Question

Exercise 12-38 Uneven Cash Flows; NPV; Sensitivity Analysis [LO 12-4, 12-5]

MaxiCare Corporation, a not-for-profit organization, specializes in health care for senior citizens. Management is considering whether to expand operations by opening a new chain of care centers in the inner city of large metropolitan areas. For a new facility, initial cash outlays for lease, renovations, net working capital, training, and other costs are expected to be about $27 million. The corporation expects the cash inflows of each new facility in its first year of operation to equal the initial investment outlay for the facility. Net cash inflows are expected to increase to $7.0 million in each of years 2 and 3; $2.5 million in year 4; and $3.0 million in each of years 5 through 10. The lease agreement for the facility will expire at the end of year 10, and MaxiCare expects the cost to close a facility will pretty much exhaust all cash proceeds from the disposal. Cost of capital for MaxiCare is estimated as 12%. Assume that all cash flows occur at year end.

Required:

1. Compute (using the built-in NPV function in Excel) the net present value (NPV) the proposed investment. (Negative amount should be indicated by a minus sign. Enter your answer in whole dollars, not in millions, rounded to nearest whole dollar.)

2. Compute (using the built-in IRR function in Excel) the internal rate of return (IRR) for the proposed investment. (Round your final answer 2 decimal places. (i.e. .1234 = 12.34%))

3. What is the breakeven selling price for this investment, that is, the price that would yield an NPV of $0? (Use the Goal Seek function in Excel to determine the breakeven selling price. The following online tutorial may be helpful to you: Goal Seek Tutorial.) (Enter your answer in whole dollars, not in millions, rounded to nearest whole dollar.)

HOW DO I FIND THE BREAKEVEN SELLING PRICE?

Answer 1

1.

	Year	Cash Flows	PV Factor @ 12%	Value
Initial Investment	0	-2,70,00,000.00	1.00000	-2,70,00,000.00
Net cash inflow	1	-	0.89286	-
Net cash inflow	2	70,00,000.00	0.79719	55,80,330.00
Net cash inflow	3	70,00,000.00	0.71178	49,82,460.00
Net cash inflow	4	25,00,000.00	0.63552	15,88,800.00
Net cash inflow	5	30,00,000.00	0.56743	17,02,290.00
Net cash inflow	6	30,00,000.00	0.50663	15,19,890.00
Net cash inflow	7	30,00,000.00	0.45235	13,57,050.00
Net cash inflow	8	30,00,000.00	0.40388	12,11,640.00
Net cash inflow	9	30,00,000.00	0.36061	10,81,830.00
Net cash inflow	10	30,00,000.00	0.32197	9,65,910.00
Total		75,00,000.00	NPV =	-70,09,800.00

NPV = - $7,009,800

2. Calculation of IRR:

Present value of future cash inflows = $19,990,200

IRR = $19,990,200 / $27,000,000 = 7.40%

3. Breakeven selling price for this investment = Present value of Cash inflows

= $19,990,200