The staff of Jefferson Medical Services has estimated the following net cash

The staff of Jefferson Medical Services has estimated the following net cash

10.4 The staff of Jefferson Medical Services has estimated the following net cash flows for a food services operation that it may open in its outpatient clinic:Year Expected Net Cash Flow0 ($100,000)1 30,0002 30,0003 30,0004 30,0005 30,0005(salvage value) 20,000 The year 0 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 percent.What is the project’s IRR?Assuming the project has average risk, what is its NPVNow, assume that the operating cash flows in years 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 are the worst case and best case IRRs? The worst case and best case NPVs?10.6 The managers of United Medtronics are evaluating the following four projects for the coming budget period. The firm’s corporate cost of capital is 14 percent.Project Cost IRRA $15,000 17%B 15,000 16%C 12,000 15%D 20,000 13%What is the firm’s capital budget?Now, suppose Medtronic’s managers want to consider differential risk in the capital budgeting process. Project A has average risk, B has below-average risk, C has above-average risk, and D has average risk. What is the firm’s optimal capital budget when differential risk is considered? (Hint: The firm’s managers lower the IRR of high-risk projects by 3 percentage points and raise the IRR of low-risk projects by the same amount.)


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