Problem 1: Winston Clinic is evaluating a project that costs $52,125 and has expected net cash flows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 12 percent.
1) What is the project's payback?
2) What is the project's NPV? Its IRR?
3) Is the project financially acceptable? Explain your answer.
Problem 2: Better Health, Inc. is evaluating two investment projects, each of which requires an up-front expenditure of $1.5 million. The projects are expected to produce the following net cash inflows:
Year Project A Project B
0 -$1,500,000 -$1,500,000
1 $500,000 $2,000,000
2 $1,000,000 $1,000,000
3 $2,000,000 $600,000
a. What is each project's IRR?
b. What is each project's NPV if the cost of capital is 10 percent? 5 percent? 15 percent?