The staff of Jefferson Medical Services has estimated the following net cash flows for a food services operation that it may open in its outpatient clinic:
Year Expected Net Cash Flow
0 ($100,000)
1 $30,000
2 $30,000
3 $30,000
4 $30,000
5 $30,000
5 (salvage value) $20,000
The Year 0 cash flow is the net investment outlay, while the final amount is th terminal cash flow. (The clinic is expected to move to a new building in five years.) All other flows represent net operating cash flows. Jefferson’s corporate cost of capital is 10 percent.
Now, assume that the operating cash flows in Years 1 through 5 could be as low as $20,000 or as high as $40,000. Furthermore, the salvage value cash flow at the end of Year 5 could be as low as $0 or as high as $30,000. What are the worst case and best case IRRs? The worst case and best NPVs?