The Year 0 cash flow is the investment cost of the new food service, while the final amount is the terminal cash flow. (The clinic is expected to move to a new building in five years.) All other flows represent net operating cash flows. Jefferson's corporate cost of capital is 10 percent. a. What is the project's IRR? b. Assuming the project has average risk, what is its NPV? Now, assume that the operating cash flows in Years 1 through 5 can be as low as $20,000 or as high as $40,000. Furthermore, the salvage value cash flow at the end of Year 5 can be as low as $O or as high as $30,000. What is the worst case and best case IRR? Worst case and best case NPV?

Essentials Of Investments
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Chapter1: Investments: Background And Issues
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### Jefferson Memorial Hospital's Satellite Food Services Operation Cash Flow Analysis

The staff of Jefferson Memorial Hospital has estimated the following net cash flows for a satellite food services operation that it may open in its outpatient clinic:

#### Expected Net Cash Flow Table

| Year | Expected Net Cash Flow |
|------|------------------------|
| 0    | ($100,000)             |
| 1    | $30,000                |
| 2    | $30,000                |
| 3    | $30,000                |
| 4    | $30,000                |
| 5    | $30,000                |
| 5 Salvage Value | $20,000         |

#### Explanation

- **Year 0 cash flow** is the investment cost of the new food service, amounting to ($100,000). This is the initial outlay for the project.
- The **final cash flow** in Year 5 includes a salvage value of $20,000 as the terminal cash flow. This is because the clinic is expected to move to a new building in five years.
- **Years 1 to 5** show annual net operating cash flows of $30,000 each.

#### Financial Analysis Questions

a. **What is the project's Internal Rate of Return (IRR)?**

b. **Assuming the project has average risk, what is its Net Present Value (NPV)?** 

Jefferson's corporate cost of capital is estimated to be 10 percent.

#### Scenario Analysis

Assume variability in operating cash flows and salvage values:

- Operating cash flows in Years 1 through 5 could range from as low as $20,000 to as high as $40,000.
- Salvage value at the end of Year 5 may vary from $0 to as high as $30,000.

- **What are the worst-case and best-case scenarios for IRR and NPV?**
Transcribed Image Text:### Jefferson Memorial Hospital's Satellite Food Services Operation Cash Flow Analysis The staff of Jefferson Memorial Hospital has estimated the following net cash flows for a satellite food services operation that it may open in its outpatient clinic: #### Expected Net Cash Flow Table | Year | Expected Net Cash Flow | |------|------------------------| | 0 | ($100,000) | | 1 | $30,000 | | 2 | $30,000 | | 3 | $30,000 | | 4 | $30,000 | | 5 | $30,000 | | 5 Salvage Value | $20,000 | #### Explanation - **Year 0 cash flow** is the investment cost of the new food service, amounting to ($100,000). This is the initial outlay for the project. - The **final cash flow** in Year 5 includes a salvage value of $20,000 as the terminal cash flow. This is because the clinic is expected to move to a new building in five years. - **Years 1 to 5** show annual net operating cash flows of $30,000 each. #### Financial Analysis Questions a. **What is the project's Internal Rate of Return (IRR)?** b. **Assuming the project has average risk, what is its Net Present Value (NPV)?** Jefferson's corporate cost of capital is estimated to be 10 percent. #### Scenario Analysis Assume variability in operating cash flows and salvage values: - Operating cash flows in Years 1 through 5 could range from as low as $20,000 to as high as $40,000. - Salvage value at the end of Year 5 may vary from $0 to as high as $30,000. - **What are the worst-case and best-case scenarios for IRR and NPV?**
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