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 $12 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.) 1. Estimated NPV 2. % Estimated IRR Breakeven selling price 3.

Answer 1

Answer:

1	Estimated NPV	(1,063,610)
2	Estimated IRR	10.31%
3	Breakeven selling price	10,936,390

Calculation

1.

To calculate NPV, we need to take the cash inflows and multiply with the PV factor for each year as below:

PV Factor for 12%: We could either use PV Formula in excel, use tables or manual formulas.

Year	Net cash inflows: (a)	PV Factor (12%) (b)	Present Value (a)x(b)
1	-	0.89286	-
2	1,000,000	0.79719	797,194
3	1,000,000	0.71178	711,780
4	2,500,000	0.63552	1,588,795
5	3,000,000	0.56743	1,702,281
6	3,000,000	0.50663	1,519,893
7	3,000,000	0.45235	1,357,048
8	3,000,000	0.40388	1,211,650
9	3,000,000	0.36061	1,081,830
10	3,000,000	0.32197	965,920
Present Value of future cash inflows			10,936,390

Then deduct the cash inflow as below:

Present Value of future cash inflows	10,936,390
Less: Initial investment outlay	12,000,000
Net Present Value	(1,063,610)

2.

Internal Rate of Return (IRR) = 10.31%

Using the MSExcel formula IRR(values,guess):

Values = all Net cash inflows and outflows

Guess = 0.1

3.

First, reinput portion of the contains Cash Flow information:

A B 61 62 63 year 0 (initial investment outlay) 64 65 66 67 year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 ($12,000,000) $0 $1,000,000 $1,000,000 $2,500,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000 68 69 70 71 72 73 74 NPV IRRE ($1,063,610) 10.31% 75 70

Manally input the values for Year 0 to Year 10. But use below formula for NPV and IRR

=NPV(B32,B63:B72) +B62

=IRR(B62:B72,0.1)

Then go to DATA Tab, select What if and then choose goal seek. And input the cells as shown in the picture below

A Goal Seek ? X year 0 (initial investment outlay) * Set cell: B74 To value: 0 By changing cell: $B$62 OK Cancel year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 |_($12,000,000 $0 $1,000,000 $1,000,000 $2,500,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000 NPV IRR = ($1,063,610)! 10.31%

Then click OK. It will automatically generate following result

61 62 year 0 (initial investment outlay) 3 year 1 64 65 66 year 2 year 3 year 4 year 5 year 6 67 ($10,936,390) $0 $1,000,000 $1,000,000 $2,500,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000 9 year 7 70 71 72 73 74 75 76 year 8 year 9 year 10 NPV IRR $0 12.00%

So the answer = 10,936,390