Palms Hospital
1. Address the following issues: A) Define the term incremental cash flow. As the project, at least constructively, will be financed in part by debt, should the cash flows include interest expense? Explain.
-Incremental cash flow is the additional operating cash flow that an organization obtains from taking on a new project. Yes the cash flow should include interest expense as burrowing money was a direct result of taking on this project.
B) The hospital already owns the site for the center, so should any cost be attributed to the land? Explain.
-Since the hospital has already paid for the land five years ago, it should now be considered as a sunk cost. The $150,000 payment has already happened and will…show more content… 2. Answer the following questions A) What is the project’s payback? What type of information do decision makers derive from the payback?
-This project’s payback is 4.1 years. Decision makers use this information to determine and measure how long the project will take before it pays for itself. This could be seen to similar as a breakeven analysis.
B) What is the project’s net present value (NPV)? Explain the meaning of the NPV.
-The project’s NPV is $881,229. NPV is the present value of the annual free cash flows of the investment minus the initial investment cost. This means that we take all the future cash flows from an investment, discount them back to their present value today and subtract the initial cost. This will then be telling you what your future money is worth today.
C) What is the project’s internal rate of return (IRR)? Explain the economic rationale behind IRR.
-The project’s IRR is 12.9%. The economic rationale behind IRR is that IRR converts different payment returns overtime into a single value and represents this number as a percentage. IRR calculates the effective percentage return that one is going to be receiving.
D) What is the project’s modified internal rate of return (MIRR)? How does MIRR differ from IRR?
-The project’s MIRR is 11.8%. The MIRR and IRR percentage difference is 1.1%. The IRR assumes the cash flows are reinvested at the IRR while the MIRR assumes that the