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CFO at a local hospital - payback, NPV, and IRR

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Assume you are the CFO at a local hospital. The CEO has asked you to analyze two proposed capital investments - Project X and Project Y. Each requires a net investment outlay of $10,000 and the opportunity cost of capital for each project is 12%. 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, NPV, and IRR
b. Which project (or projects) is financially acceptable? Explain your anser

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Solution Summary

Your tutorial computes the required project metrics in excel so you have a template for other similar problems. A recommendation is made and supported with three paragraphs of comments.

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Only project X is acceptable because it earns better than the other opportunities that compete for limited financial resources (that can generate the 12%). This is seen in both the positive NPV, meaning that the project has a present v alue above the opportunity ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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