The staff of Jefferson Memorial Hospital has estimated the following net cash flows for a satellite food services operation that it may open in its outpatient clinic:
The Year 0 cash flow is the investment cost of the new food service, while the final amount is the terminal cash flow. (The clinic is expected to move to a new building in five years.) All other flows represent net operating cash flows. Jeffersonâ€™s corporate cost of capital is 10 percent.
a. What is the projectâ€™s IRR?
b. Assuming the project has average risk, what is its NPV?
c. Now, assume that the operating cash flows in Years 1â€“5 could be as low as $20,000 or as high as $40,000. Furthermore, the salvage value cash flow at the end of Year 5 could be as low as $0 or as high as $30,000. What is the worst case and best case IRR? The worst case and best case NPV?