New Finance Questions

4 finance questions I need the answers for by 8pm EST please. Attached are the questions.

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2

California Imaging Center, a not-for-profit business, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated salvage value of $200,000 at that time. The equipment is expected to be used 1

5

times a day for 250 days a year for each year of the project’s life. On average, each procedure is expected to generate $80 in cash collections

during the first year of use. Thus, net revenues for

Year

1 are estimated at 15 x 250 x $80 = $

3

00,000.

Labor and maintenance costs are expected to be $100,000 during the first year of operation, while utilities will cost another $10,000 and cash overhead will increase by $5,000 in Year 1. The cost for expendable supplies is expected to average $5 per procedure during the first year. All costs and revenues are expected to increase

at a 5 percent inflation rate after the first year. The center’s corporate cost of capital is 10 percent.

a. Estimate the project’s net cash flows over its five-year estimated life. (Hint: Use

the following format as a guide.)

CHAPTER PROBLEMS

b. What are the project’s NPV and IRR? (Assume for now that the project has average

risk.)

c. Assume the project is assessed to have high risk and California Imaging Center adds

or subtracts 3 percentage points to adjust for project risk. Now, what is the project’s

NPV? Does the risk assessment change how the project’s IRR is interpreted?

Also, I had this question last week,

Define financial risk. Why is risk analysis so important to capital investment decisions?  I answered the following which was correct. I had a follow up question which I will post below this answer.

Financial risk is an umbrella term for multiple types of risk
associated with financing, including financial transactions that
include company loans in risk of default. Risk is a term often used to
imply downside risk  meaning the uncertainty of a return and the
potential for financial loss.  Its important because Uncertainties can
exist when the outcome of an event is not known for certain, and when
dealing with assets whose cash flows are expected to extend beyond one
year, certainly, there’s element of risk in that situation. The
evaluation of risk therefore depends, on decision making ability to
identify and understand the nature of uncertainty surrounding the key
variables and on the other, having the tools and methodology to
process its risk implications. Various rules of thumb are often used
to make these risk adjustment, one of them is using a simulation
method. The direct use of the risk analysis in capital budgeting is
not common. It is very difficult to specify utility function in
practice. Even if it is possible to derive utility function, it does
not remain constant over time. Problems are also encountered when
decision is taken by group of people. Individuals differ in their risk
preferences. Thus, it is necessary .
my teacher than asked me this,
How would the above answer compare to the Strategic Value of a project? Please explain?
(A couple of sentences is fine it doesn’t have to be long.)