Cannibal Hospital Corporation is considering buying a small, local hospital for $125 (all dollars in millions).  If the firm makes the investment (today), its cash flows will increase by $10 in year 1, $20 in year 2, $50 in year 3, and $75 in year 4.  No other cash flows will be generated by this project.   

A. If the discount rate is 10%, what is the present value of the four future cash flows?  Should the firm make the investment?  (Is the present value of the future benefits greater than the initial investment?)

B. If the discount rate is 6%, what is the present value of the four future cash flows?  Should the firm make the investment?

Answer rating: 100% (QA)

A To calculate the present value of the four future cash flows we need to discount each cash flow to ... View the full answer