Buckeye Healthcare Corp. is proposing to spend $186,725 on an eight-year project that has estimated net cash flows

Buckeye Healthcare Corp. is proposing to spend $186,725 on an eight-year project that has estimated net cash flows of $35,000 for each of the eight years.

a. Compute the net present value, using a rate of return of 12%. Use the present value of an annuity of $1 table in the chapter (Exhibit 2).

b. Based on the analysis prepared in part (a), is the rate of return (1) more than 12%, (2) 12%, or (3) less than 12%? Explain.

c. Determine the internal rate of return by computing a present value factor for an annuity of $1 and using the present value of an annuity of $1 table presented in the text (Exhibit 2).

Answer:

a. Present value of annual net cash flows ($35,000 × 4.968*)…………………… $173,880 

 Less amount to be invested………………………………………………………   186,725 

 Net present value…………………………………………………………………… $ (12,845) 

* Present value of an annuity of $1 at 12% for 8 periods from text Exhibit 2. 

b. The rate of return is less than 12% because there is a negative net present 

value. 

c. Present Value Factor 

for an Annuity of $1  = 

= 

Amount to Be Invested 

Annual Net Cash Flow 

$186,725 

$35,000 

Internal Rate of Return 

= 5.335 

=  10% (from text Exhibit 2, 8 periods)