Assume that you are the chief financial officer at Porter Memorial Hospital. The
ID: 2788280 • Letter: A
Question
Assume that you are the chief financial officer at Porter Memorial Hospital. The CEO has asked to to analyze two proposed capital investments ----Project X and Project Y. Each project requires a net investment outlay of $10,000, and the cost of capital for each project is 12%. The projects’ expected net cash flows are; Year Project X Project Y 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
QUESTION - b. Which project (or projects) is financially acceptable? Explain your answer.
Explanation / Answer
Project X
CF0 = -10,000
CF1 = 6,500
CF2 = 3,000
CF3 = 3,000
CF4 = 1,000
NPV = -10,000 + 6,500/(1 + 12%) + 3,000/(1 + 12%)2 + 3,000/(1 + 12%)3 + 1,000/(1 + 12%)4
NPV = 966.01
Project Y
CF0 = -10,000
CF1 = 3,000
CF2 = 3,000
CF3 = 3,000
CF4 = 3,000
NPV = -10,000 + 3,000/(1 + 12%) + 3,000/(1 + 12%)2 + 3,000/(1 + 12%)3 + 3,000/(1 + 12%)4
NPV = -887.95
As we can see, Project X has positive NPV and project Y has negative NPV.
By selection project X it will increase the firm's value.