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Internal Rate of Return in Cash Flow Estimation

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Pinehill Medical Associates (PMA) wants to expand. The medical group can acquire an open former medical facility nearby for $150,000 and will need an additional $50,000 for renovations with a total mortgage of $200,000. The payment will be $1050 per month for 30 years. Another option is to build a new facility for $250,000 and with monthly mortgage payments of $1100. The discount rate for both projects is 10%. The cost of capital is 15%. (See attached file for table).
• Determine which scenario would be the best option for the group over the next five years in terms of Internal Rate of Return (IRR).
• Write an interpretation of your findings and submit as a WORD document.

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Solution Preview

We are given two potential options for financing a building, presumably to afford the firm the ability to increase income over the next several years. The financial principle involved is time value of money - we are being asked to determine the net present value of the future income, then we need to discount it back to the present in order to gain a firm understanding of the REAL amount available from an investment perspective.

See spread sheet attached, it breaks down the calculations for each ...

Solution Summary

The expert determines the real net present value of two investment opportunities anyhow to interpret their potential