1. Consider the following uneven cash flow stream:
|
Year
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Cash Flow
|
$0
|
250
|
400
|
500
|
600
|
600
|
a) What is the present (year 0) value of the cash flow stream if the opportunity cost rate is 10%?
b) Add an outflow (or cost) of $1,000 at year 0. What is the present value (or net present value) of the stream?
2. Assume that you are the chief financial officer at Porter Memorial Hospital. The CEO has asked you 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 percent. The project's 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
|
|
|
|
a) Calculate each project's payback period, net present value (NPV), and internal rate of return (IRR)
b) Which project (or projects) is financially acceptable? Explain your answer.