2. Heywood Diagnostic Enterprise is evaluating a project with the following net cash flows and probabilities 0 ($100,000) ($100,000) ($100,000) 1 20,000 30,000 40,000 2 20,000 30,000 40,000 3 20,000

2. Heywood Diagnostic Enterprise is evaluating a project with the following net cash flows and probabilities 0 ($100,000) ($100,000) ($100,000) 1 20,000 30,000 40,000 2 20,000 30,000 40,000 3 20,000 30,000 40,000 4 20,000 30,000 ` 40,000 5 30,000 40,000 50,000 The Year 5 values include salvage value. Heywood’s corporate cost of capital is 10 percent is the projects expected (i.e. base case) NPV assuming average risk? ( nt: The base net cash flows are the expected cash flows in each year) are the project’s most likely, worst and best cases NPVs? is the projects’ expected NPV on the basis of the scenario analysis? is the projects standard deviation of NPV? Assume that Heywood’s managers judge the project to have lowered that average risk. Furthermore, the company’s policy is to adjust the corporate cost of capital up or down by 3 percentage point to account for differential risk. Is the project financially attractive? 3. Consider the project contained in problem 14.7 in chapter 14. a. Perform a sensitivity analysis to see how NPV is affected by changes in the number of procedures per day, average collection amount. And salvage value. b. Conduct a scenario analysis. Supposed that the hospital’s staff concluded that the three most uncertain variables were numbers of procedures’ per day, average collection amount and the equipment’s salvage value. Furthermore the following data were developed; Worst 0.25 10 $60 $100,000 Most Likely 0.50 15 80 200,000 Best 0.25 20 100 300,000 c. Finally, assume that California Health Center’s average project has a coefficient of variation of NPV in the range of 1.0-2.0 (nt; the coefficient of variation is defined as the standard deviation of NPV divided by the expected NPV) The hospital adjusts for risk by adding or subtracting 3 percentage points to it’s 10 percent corporate cost of capital. After adjusting for differential risk, is the project still profitable? d. type of risk was measured and accounted for in parts b and c? Should this be of concern to the hospital’s manager? 4. The managers of United Medtronic’s are evaluating the following four projects for the coming budget period. The firms corporate cost of capital is 14 percent. A $15,000 17% B 15,000 16 C 12,000 15 D 20,000 13

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