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%. The project’s expected net cash flows are as follows:
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?
b. Calculate net present value (NPV)?
c. Calculate internal rate of return (IRR)?
d. Which project (or projects is financially acceptable?
e. Explain your answer.

15.3 Consider the project contained in Problem 14.7 in Chapter 14.

a. Perform a sensitivity analysis to see how NPV is affected by changes in the number of procedures per day, average collection amount, and salvage value.

b. Conduct a scenario analysis. Suppose that the hospital’s staff concluded that the three most uncertain variables were number of procedures per day, average collection amount, and the equipment’s salvage value. Furthermore, the following data were developed: Number of Average Equipment Scenario Probability Procedures Collection Salvage Value Worst 0.25 10 $ 60 $100,000Most likely 0.50 15 80 200,000Best 0.25 20 100 300,000

c. Finally, assume that California Health Center’s average project has a coefficient of variation of NPV in the range of 1.0-2.0. (Hint: Coefficient of variation is defined as the standard deviation of NPV divided by the expected NPV.) The hospital adjusts for risk by adding or subtracting 3 percentage points to its 10 percent corporate cost of capital. After adjusting for differential risk, is the project still profitable?

d. What type of risk was measured and accounted for in Parts b and c? Should this be of concern to the hospital’s managers?

A quaint but well-established coffee shop, the Hot New Café, wants to build a new café for increased capacity. Consider the following financial aspects of this endeavor:

• Expected sales are $800,000 for the first 5 years.
• Direct costs, including labor and materials, will be 50% of sales.
• Indirect costs are estimated at $200,000 a year.
• The cost of the building for the new café will be a total of $850,000, which will be depreciated straight line over the next 5 years.
• The firm’s marginal tax rate is 38%, and its cost of capital is 10%.

For this assignment, you need to develop a capital budget. It is important to know what the café managers should consider within their capital budget. You must also define the key terms necessary to understand capital budgeting. In this assignment, please show all work, including formulae and calculations used to arrive at financial values.

You must answer the following using the information above:

• Prepare a capital budget for the Hot New Café with the net cash flows for this project over a 5-year period. 
• Calculate the payback period (P/B) and the net present value (NPV) for the project. 
• Answer the following questions based on your P/B and NPV calculations: 
  • Do you think the project should be accepted? Why? 
  • Define and describe net present value (NPV) as it pertains to the new cafe. 
  • Assume the company has a P/B (payback) policy of not accepting projects with a life of over 3 years. Do you think the project should be accepted? Why?

Your submitted assignment must include the following:

• A double-spaced, 2-page Word document that contains answers to the questions. 
• You must include a Microsoft Excel spreadsheet for your calculations. 
• Either the Word document or the Excel spreadsheet must have all of your calculation values, your complete calculations, any formulae that you used, the sources you wish to cite, and your answers to the questions listed in the assignment guidelines.

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