Question

Dr. Yuan opens a lab. The lab has an initial cost of $100,000. Expected net cash flow is $24,000 in the first year, growing by 15% per year. Net cash flow is revenue less expenses. Assume the lab has a 6 year life and there is no scrap value for the lab. Assume instead that Dr. Yuan forms a partnership with Dr. Bhat. They agree to share the $100,000 cost equally and to share the cash flow equally. Because of efficiency gains from longer operating hours, they expect the net cash flow to be $32,000 per year. Assume they expect net cash flow to grow at 15% per year.

What is the consequence of the partnership to Dr. Yuan? Please compare the results to the original scenario described (Dr. Yan opening the only lab in the area).

a) The NPV decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment.

b) The NPV decreases, and becomes negative. Dr. Yuan should expect a loss on this investment.

c) The IRR decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment.

d) The IRR and the NPV increase. Dr. Yuan can still expect a positive return on her investment.

e) The IRR and the NPV decrease. Dr. Yuan should expect a negative return on her investment.

Answer 1

Ans. D. The IRR and NPV increases. Dr.Yuan can still expect a positive return on her investment. - This is the correct option.

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