Question

MaxiCare Corporation, a not-for-profit organization, specializes in health care for senior citizens. Management is considering whether to expand operations by opening a new chain of care centers in the inner city of large metropolitan areas. For a new facility, initial cash outlays for lease, renovations, net working capital, training, and other costs are expected to be about $14 million. The corporation expects the cash inflows of each new facility in its first year of operation to equal the initial investment outlay for the facility. Net cash inflows are expected to increase to $1.0 million in each of years 2 and 3; $2.5 million in year 4; and $3.0 million in each of years 5 through 10. The lease agreement for the facility will expire at the end of year 10, and MaxiCare expects the cost to close a facility will pretty much exhaust all cash proceeds from the disposal. Cost of capital for MaxiCare is estimated as 12%. Assume that all cash flows occur at year end.

MaxiCare Corporation, a not-for-profit organization, specializes in health care for senior citizens. Management is considering whether to expand operations by opening a new chain of care centers in the inner city of large metropolitan areas. For a new facility, initial cash outlays for lease, renovations, net working capital, training, and other costs are expected to be about $14 million. The corporation expects the cash inflows of each new facility in its first year of operation to equal the initial investment outlay for the facility. Net cash inflows are expected to increase to $1.0 million in each of years 2 and 3; $2.5 million in year 4; and $3.0 million in each of years 5 through 10. The lease agreement for the facility will expire at the end of year 10, and MaxiCare expects the cost to close a facility will pretty much exhaust all cash proceeds from the disposal. Cost of capital for MaxiCare is estimated as 12%. Assume that all cash flows occur at year end. Required: 1. Compute (using the built-in NPV function in Excel) the net present value (NPV) the proposed investment. (Negative amount should be indicated by a minus sign. Enter your answer in whole dollars, not in millions, rounded to nearest whole dollar.) 2. Compute (using the built-in IRR function in Excel) the internal rate of return (IRR) for the proposed investment. (Round your final answer 2 decimal places. (i.e. .1234 = 12.34%)) 3. What is the breakeven selling price for this investment, that is, the price that would yield an NPV of $0? (Use the Goal Seek function in Excel to determine the breakeven selling price. The following online tutorial may be helpful to you: Goal Seek Tutorial.) (Enter your answer in whole dollars, not in millions, rounded to nearest whole dollar.) Estimated NPV 1. 2. Estimated IRR 3. Breakeven selling price

Required:

1. Compute (using the built-in NPV function in Excel) the net present value (NPV) the proposed investment. (Negative amount should be indicated by a minus sign. Enter your answer in whole dollars, not in millions, rounded to nearest whole dollar.)

2. Compute (using the built-in IRR function in Excel) the internal rate of return (IRR) for the proposed investment. (Round your final answer 2 decimal places. (i.e. .1234 = 12.34%))

3. What is the breakeven selling price for this investment, that is, the price that would yield an NPV of $0? (Use the Goal Seek function in Excel to determine the breakeven selling price. The following online tutorial may be helpful to you: Goal Seek Tutorial.) (Enter your answer in whole dollars, not in millions, rounded to nearest whole dollar.)

Answer 1

	Solution:
	Values as per the given problem:
		(Amount in $)
	Net cash inflows:
	year 0 (initial investment outlay)	-14000000
	year 1	0
	year 2	1000000
	year 3	1000000
	year 4	2500000
	year 5	3000000
	year 6	3000000
	year 7	3000000
	year 8	3000000
	year 9	3000000
	year 10	3000000
	Lease agreement expires (end of year)	10
	Cost of capital	12%
	PV annuity factor, 6 years, 12%
1	Calculation of Net Present Value
	Net cash inflows:		PV Factor (12%)	Present Value
	year 1	0	0.892857	0
	year 2	1000000	0.797194	797193.8776
	year 3	1000000	0.711780	711780.2478
	year 4	2500000	0.635518	1588795.196
	year 5 to 10	3000000	2.612615	7837844.461
	Present Value of future cash inflows			10935614
	Less: Initial investment outlay			14000000
	Net Present Value			-3064386
2	Calculation of IRR
	IRR is calculated with the built in IRR function in Excel			8%
3	Break Even Price will be	10935614	$