A private clinic evaluates two alternative investment programs, A and B, with a lifetime of 5 years
Question:
A private clinic evaluates two alternative investment programs, A and B, with a lifetime of 5 years and a cost of 150,000 euros. The clinic estimates that each of these programs will yield additional cash flow thereafter from taxes according to the table below. The amounts are in euros.
Program A | Program B |
-150000 | -150000 |
25000 | 60000 |
45000 | 40000 |
80000 | 50000 |
50000 | 30000 |
50000 | 30000 |
A) Apply the NPV criterion and indicate which of the two programs the clinic should choose. Adopt a discount rate of 2%. (Units 1)
B) If the discount rate changes from 2% to 4%, does your choice in question A remain the same? (0.5 units)
C) Which of the two programs faces greater risk in potential changes in interest rates? (Units 1)
D) Apply the internal rate of return criterion (using excel) and indicate which of the two programs the clinic should choose based on this criterion. (0.5 units)
E) Apply the payback period criterion and indicate which of the two plans the clinic should choose, based on this criterion (Points 0, 5)
F) Which criterion from the above would you trust for your choice? Analyze critically (1.5 Credits)
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill