The director of capital budgeting for Big Sky Health Systems, Inc., has estimate
ID: 2743819 • Letter: T
Question
The director of capital budgeting for Big Sky Health Systems, Inc., has estimated the following cash flows in thousands of dollars for a proposed new service: Year:0,1,2,3 Expected Net Cash Flow ($100), 70, 50, 20 (a)The project's cost of capital is 10 percent. (b) The project's NPV is $19,984.97 (c) The project's IRR is 24%. Its MIRR is 17%. what would you recommen if there was an opportunity cost involved of $15,000 (total) in today's dollars obtained by renting the space involved int he new service to an outside entity for 3 years? why or why not?
Explanation / Answer
Even after considering the opportunity cost of renting the space in today’s dollars the net present value of project would be greater than the zero ($19,984.97 - $15,000), which means the internal rate of return would be more than the cost of capital. Thus, the firm should accept the project and go for investing in new service.