1. Better Health Inc. is evaluating two capital investments, each of which requires an up-front (Year 0) expenditure of $1.5 million. The projects are expected to produce the following net cash in Flows:
Year Project A Project B
1 $ 500,000 $2,000,000
2 1,000,000 1,000,000
3 2,000,000 600,000
a. What is each project’s IRR?
b. What is each project’s NPV if the opportunity cost of capital is 10 percent? 5 percent? 15 percent?
2. Capitol Health Plans, Inc. is evaluating two different methods for providing home health services to its members. Both methods involve contracting out for services, and the health outcomes and revenues are not affected by the method chosen. Therefore, the incremental cash flows for the decision are all outflows. Here are the projected flows:
3. Year Method A Method B
4. 0 -$ 300000 -$ 120,000
5. 1 -$ 66,000 -$ 96,000
6. 2 -$ 66,000 -$ 96,000
7. 3 -$ 66,000 -$ 96,000
8. 4 -$ 66,000 -$ 96,000
9. 5 -$ 66,000 -$ 96,000
10. a. What is each alternative’s IRR?
11. b. If the cost of capital for both methods is 9 percent, which method should be chosen? Why?
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