Refer to the table developed in problem 15.5 for University Health Center. Assume the Managed Care Division is evaluating a project with the net cash flows and probabilities shown in the table below.

Assume the Managed Care Division has judged the project to have lower-than-average risk. Is the project financially attractive?

Problem 15.5

University Health Center has three divisions: Real Estate, with an 8 percent cost of capital; Health Services, with a 10 percent cost of capital; and Managed Care, with a 12 percent cost of capital. The center’s risk adjustment procedures call for adding 3 percentage points to adjust for high risk and subtracting 2 percentage points for low risk. Construct a diagram such as the one in exhibit 15.8 that illustrates the range of project costs of capital for the center.

Exhibit 15.8

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Year Prob. = 0.3 Prob. = 0.4 Prob. = 0.3 0 ($100,000) ($100,000) ($100,000) 1 20,000 30,000 40,000 23 2 20,000 30,000 40,000 20,000 30,000 40,000 4 20,000 30,000 40,000