Letterman Hospital expects Projects A and B to generate the following cash flows:
|
Givens (in thousands) |
Years |
0 |
1 |
2 |
3 |
4 |
5 |
|
1 Initial investment |
($2,500) |
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|
2 Net operating cash flows for Project A |
$1,800 |
$1,600 |
$900 |
$400 |
$200 |
||
|
3 Net operating cash flows for Project II |
$200 |
$400 |
$900 |
$1,600 |
$1,800 |
||
|
4 Discount rate for Part a |
15% |
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|
5 Discount rate for Part b |
5% |
a. Determine the NPV for both projects using a cost of capital of 15 percent.
b. Determine the NPV for both projects using a cost of capital of 5 percent.
c. At a 5 percent cost of capital, which project should be accepted? At a 15 percent cost of capital, which project should be accepted? Explain.