Question

Use the information provided below to answer the following questions about Big Sky Health System, Inc.

The director of capital budgeting for Big Sky Health System, Inc. has estimated the following cash flows for a new service and has a cost of capital of 10%.

Year		Expected Net Cash Flow
0		($100,000)
1		$70,000
2		$50,000
3		$20,000

1a. What is the project’s payback period?

Choice: 4 years

Choice: Not enough information to tell

Choice: 1.6 years

Choice: 2.4 years

1b. What is the project’s NPV?

Choice: $13,981

Choice: $16,458

Choice: $22,385

Choice: $19,985

1c. What is the project’s IRR?

Choice: 14.6%

Choice: 23.6%

Choice: 18.7%

Choice: 8.9%

1d. What is the project’s MIRR?

Choice: 12.0%

Choice: 16.9%

Choice: 13.3%

Choice: 9.5%

Answer 1

1a. Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 1 + (30000 / 50000)

= 1.6 Years

Hence the correct answer is 1.6 Years

1b. NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ $ 70,000 * 1/ (1.1) ^ 1 + $ 50,000* 1/ (1.1) ^2 + $ 20000* 1/ (1.1) ^3] - $ 100,000

= $ 19,984.97

Hence the correct answer is $ 19,985

1c.

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

100,000 = 70,000 /(1.0x) + 50,000 / (1.0x)^2 + 20,000 /(1.0x)^3   

Or x= 23.564%

Hence the IRR is 23.6%

1d. Future Value = Present Value * ( 1+ Rate of Interest ) ^ Time

= $ 119,984.97 * ( 1+10%) ^ 3

= $ 159,699.9951

MIRR=[Future value of inflows/Present value of outflow]^(1/n)-1

= [ $ 159,699.9951 / $ 100000] ^ ( 1/3 ) - 1

= 16.9%

Hence the correct answer is 16.9%