Loan Assignment
Briefly describe the main idea of this article. (minimum 250 words) How student loans and retirement savings interact with each other?
Article: Save for Retirement at the Same Time by Margaret Collins and Ben Steverman.
https://www.bloomberg.com/news/articles/2016-03-02/how-to-pay-school-loans-and-save-for-retirement-at-the-same-time
Case: Outer Limit Hospital
Key concept: Computing payback, net present value, and internal rate of return for hospital capital investment.
The Outer Limit Hospital is considering the capital financing for a new clinic for surfers that would operate from a manufactured housing unit (trailer) parked beside the beach on a vacant lot. The housing unit, with all necessary equipment, is estimated to cost $280,000. The unit and equipment will have only a five-year life due to corrosion caused by the salty air. The seaside lot will be rented on an annual basis.
The Outer Limit Hospital tentatively plans to build a permanent replacement clinic near the beach by the end of the fifth year if clinic operations appear to warrant that investment. Regardless of whether the permanent clinic is built, plans are to close and scrap the manufactured housing unit and equipment at the end of their economic life. The salvage value is expected to approximately equal the disposal costs.
Yearly revenues and operating costs for the clinic are estimated as follows:
|
|
Year o
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
|
Patient revenues
|
|
100,000
|
220,000
|
235,000
|
250,000
|
300,000
|
|
Operating costs
|
-280,000
|
100,000
|
100,000
|
100,000
|
125,000
|
150,000
|
|
Profit (toss)
|
-280,000
|
0
|
120,000
|
135,000
|
125,000
|
150,000
|
The Outer Limit Hospital applies a 20 percent cost of capital hurdle rate to risky projects of this type, and it would like the payback period to be within the first 50 percent of the project's life.
Questions
1. What is the payback period for the project?
2. What is the net present value (NPV) of the project?
3. What is the internal rate of return (IRA) for the project?
4. Should the project be undertaken? Why or why not? Discuss factors that might influence the decision making.