Purchase Solution

# Accounting: Net Present Value and Payback Period

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Letterman Hospital expects Project A and B to generate the following cash flows:

Givens (in thousands) years 0 1 2 3 4 5
1 Initial investment 0(\$2,500)
2 Net operating cash flows for project A 1\$1,800 2\$1,600 3\$900 4\$400 5\$200
3 Net operating cash flows for project B 1\$200 2\$400 3\$900 4\$1,600 5\$1,800
4 Discount rate for Part a 15%
5 Discount rate for Part b 5%

a. Determine the NPV for both projects using a cost of capital of 15 percent
b. Determine the NPV for both projects using a cost of capital of 5 percent.
c. At a 5 percent cost of capital, which project should be accepted? At a 15 percent cost of capital, which project should be accepted? Explain

Goodbar Practice expects projects 1 and 2 to generate the following cash flows:

Project 1 (in thousands) years 0 1 2 3 4 5
Givens 0 ( \$2,000)
Net operating cash flows 1\$200 2 \$300 3 \$500 4\$1,000 5\$1,790

Project 2 (in thousands)
Givens 0(\$3,800)
Net operating cash flows 1\$1,000 2\$1,000 3\$1,000 4\$1,000 5\$1,000

a. Determine the payback for the both projects.
b. Determine the IRR.
c. Determine the NPV at a cost of capital of 12 percent.

##### Solution Summary

Solution discusses net present value and payback period.

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