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Time Value of Money and Basics of Capital Budgeting Pearland Medical Center is considering two proposed capital investment opportunities, Project A and Project B. Each project requires a net...

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Time Value of Money and Basics of Capital Budgeting

Pearland Medical Center is considering two proposed capital investment opportunities, Project A and Project B. Each project requires a net investment of $100,000. The cost of capital for each project is 12 percent. The projects’ expected cash revenues are:

Year

Project A

Project B

0

($100,000)

($100,000)

1

$62,500

$32,625

2

$30,000

$32,625

3

$28,000

$32,625

4

$10,000

$32,625

  1. Calculate each project’s payback period, net present value, and internal rate of return. Explain which project is financially acceptable.
  2. Avery, Flaherty, and Rhee XXXXXXXXXXnoted that when choosing a capital budgeting decision tool, academics recommend NPV as the primary approach followed by IRR. What are the advantages and disadvantages of NPV and IRR methods in regards to profitability analysis in evaluating investment decisions?
  3. Why are firms using the payback period method as a primarily decision-making tool?

Length: 3–4 pages, excluding title page and references.

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Assessment and Grading: Your paper will be assessed based on the performance assessment rubric that is linked within the course. Review it before you begin working on the assignment.

Your submission should meet the guidelines on file format, in-text citations and references, scholarly sources, scholarly writing, and use of direct quotes noted under Module 1 Assignment Expectations.

I need 4 pages, APA, 4-5 in-text citations, 4-5 References

Answered Same Day Jul 25, 2020

Solution

Reubens answered on Jul 26 2020
135 Votes
Payback, NPV & IRR
        Pearl Medical Cente
            Statement showing cumulative cash inflows and Pay-back period of projects
            Project A        Project B
        Years    Cash Inflow    Cumulative cash inflow    Cash Inflow    Cumulative Cash inflow
        1    62,500    62500    32,625    32,625
        2    30,000    92,500    32,625    65,250
        3    28,000    120,500    32,625    97,875
        4    10,000    130,500    32,625    130,500
        1    Project A    Pay-back Period 2 years +(100,000-92,500)/28,000
                     2years +(7,500/28,000)
                     2 years +    0.2678571429
                     2.27 years
            Project B    Pay-back Period 3 years +(100,000-97,875)/32,625
                     3 years +(2,125/32,625)
                    3 years +    0.0651
                    3.07 years
            Project A is viable as the investment can be taken back within the shortest period of 2.27 years
            Calculation of Net present value
                Project A        Project B
        Years    Discounting factor @12% p.a    Cash Inflow    Present values    Cash Inflow    Present values
        1    0.8929    62,500    55806.25    32,625    29130.86
        2    0.7972    30,000    23916.00    32,625    26008.65
        3    0.7118    28,000    19930.40    32,625    23222.48
        4    0.6355    10,000    6355.00    32,625    20733.19
             Present Value        106007.65        99095.18
            Less: Capital Invested        100,000.00        100,000.00
            Net present value        6007.65        -904.83
            Project A is viable as the net present value is positive
            Calculation of Internal Rate of Return
                Project A    Project B
            Year    Cash...
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