Posted: April 18th, 2016

# which method should be chosen??

Capitol Healthplans, Inc., is evaluating two different methods for providing home health services to its members. Both methoeds involve contracting out for services, and the health outcomes and revenues are not affected by the method chosen. Therefore, the incremental cash flows for the decision are all outflows. here are the projected flows:

Year Method A Method B 0 (\$300,000) (\$120,000) 1 (66,000) (96,000) 2 (66,000) (96,000) 3 (66,000) (96,000) 4 (66,000) (96,000) 5 (66,000) (96,000)

a. What is each alternative’s IRR? b. If the cost of capital for both methods is 9 percent, which method should be chosen? Why?

Great Lakes Clinic has been asked to provide exclusive healthcare services for next year’s World Exposition. Although flattered by the request, the clinic’s managers want to conduct a financial analysis of the project. There will be an up-front cost of \$160,000 to get the clinic inoperation. Then, a net cash inflow of \$1 million is expected from operations in each of the two years of the exposition. However, the clinic has to pay the organizers of the exposition a fee for the marketing value of the opportunity. This fee, which must be paid at the end of the second year, is \$2 million.

a. What are the cash flows associated with the project? b. What is the projects’s IRR? c. Assuming a project cost of capital of 10 percent, what is the project’s NPV? d. What is the project’s MIRR?

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 projects’ 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, net present value (NPV), and internal rate of return (IRR). b. Which project (or projects) is financially acceptable? Explain your answer.

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