Question

3. Your hospital board intends to acquire an equipment that will cost it Php 50,000,000. The board is thinking of financing this acquisition via by 70% internally generated funds and 30% loan at a fixed rate of 7% per annum. The hospital has consistently given out quarterly dividends of 4%. Calculate the hospital's weighted average cost of capital. 4. Assume the hospital has the following cash flows resulting from the machine Year acquisition: (0)70,000,000:(1)10,000,000:(2)30,000,000;(3)40,000,000:(4)25,000,000;(5)25,0 00.000; Calculate the project's NPV, Profitability Index and Discounted Payback Period.

Answer 1

3)	Cost of equity = 4%*4 =	16.00%
	WACC = 7%*30%+16%*70% =	13.30%
4)	Year	Cash Flow	PVIF at 13.3%	PV at 13.3%	Cumulative PV
	0	-70000000	1.00000	-70000000	-70000000
	1	10000000	0.88261	8826125	-61173875
	2	30000000	0.77900	23370146.51	-37803728
	3	40000000	0.68756	27502378.94	-10301349
	4	25000000	0.60685	15171215.22	4869866
	5	25000000	0.53561	13390304.69	18260171
	NPV = $18,260,171			18260170.69
	PI = PV of cash inflows/Initial investment = 88260171/70000000 =			1.26
	Discounted payback in years = 3+10301349/15171215 =			3.68
	ALTERNATIVELY:
3)	Cost of equity with quarterly compounding = 1.04^4-1 =	16.99%
	WACC = 7%*30%+16.99%*70% =	13.99%
4)	Year	Cash Flow	PVIF at 13.99%	PV at 13.99%	Cumulative PV
	0	-70000000	1.00000	-70000000	-70000000
	1	10000000	0.87727	8772699	-61227301
	2	30000000	0.76960	23088076	-38139224
	3	40000000	0.67515	27005967	-11133258
	4	25000000	0.59229	14807202	3673944
	5	25000000	0.51960	12989913	16663857
	NPV = $16,663,857			16663857
	PI = PV of cash inflows/Initial investment = 86663857/70000000 =			1.24
	Discounted payback in years = 3+11133258/14807202 =			3.75