The staff of Jefferson Medical Services has estimated the following net cash flows for 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 the terminal cash flow. (the clinic is expected to move to a new building in 5 years). All other flows represent net operating cash flows. Jefferson’s corporate cost of capital is 10%.
What is the project’s IRR?
Assuming the project has average risk, what is its NPV?
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 and best cases IRRs? The worst case and best case NPVs?