The staff of Jefferson Medical Services has estimated the
following net cash flows for food services operation that it may
open in its outpatient clinic:
|
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 |
The year o cash flow is the net investment outlay, 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%.
What is the project IRR?
Assuming the project has average risk, what is its NPV?
Now assuming that operating cash flows in Year 1 through 5 could
be as low as $20,000 or as high as $40,000. Furthermore, the
salvage value cash flow at the end of Year 5 could be as low as $0
or as high as $30,000. What is the worst case and best case IRR?
The worst case and the best NPV?
