Posted: July 17th, 2016

What are the projects’s most likely, worst, and best case NPVs?

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.

The managers of Merton Medical Clinic are analyzing a proposed project. The project’s most likely NPV is $120,000, but as evidenced by the following NPV distribution, there is considerable risk involved:

Probability NPV 0.05 ($700,000) 0.20 (250,000) 0.50 120,000 0.20 200,000 0.05 300,000

a. What are the project’s expected NPV and standard deviation of NPV? b. Should the base case analysis use the most likely NPV or the expected NPV? Explain your answer.

Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities:

Year Prob = 0.2 Prob = 0.6 Prob = 0.2 0 ($100,000) ($100,000) ($100,000) 1 20,000 30,000 40,000 2 20,000 30,000 40,000 3 20,000 30,000 40,000 4 20,000 30,000 40,000 5 30,000 40,000 50,000

The Year 5 values include salvage value. Heywood’s corporate cost of capital is 10 percent. a. What is the project’s expected (i.e., base case) NPV assuming average risk? b. What are the projects’s most likely, worst, and best case NPVs? c. What is the project’s expected NPV on the basis of the scenario analysis? d. What is the project’s standard deviation of NPV?

On a typical day, Park Place Clinic writes $1,000 in checks. It generally takes four days for those checks to clear. Each day the clinic typically receives $1,000 in checks that take three days to clearn. What is the clinic’s average net float?