A regional hospital is considering whether or not to build on additional operating rooms. The current option being considered would require an investment of $1,000,000. It would then have an annual cost of $750,000 per year and bring in revenues of $950,000 per year. Both cost and revenue estimates are for the next ten years. Senior management typically requires a 15% rate of return on capital expansion projects. Answer the following questions: 1) What is the hurdle rate? 2) Draw Cash flow Diagram of this project. 3) Calculate the present worth of the project. 4) Calculate the future worth of the project. 5) Calculate the annual worth of the project. 6) Calculate the internal rate of return for the project. Solution 1. the required return on the project is 15% on $750,000, i.e. $112,500 per year 2. the cash inflow for each year is $950,000, for next 10 years. 3. the present worth of the project= 950,000X6.145= 5,837,750 4. future worth of the project= 950,000X15.937= 15,140,150 .

1. A regional hospital is considering whether or not to build on additional operating rooms. The
current option being considered would require an investment of $1,000,000. It would then have
an annual cost of $750,000 per year and bring in revenues of $950,000 per year. Both cost and
revenue estimates are for the next ten years. Senior management typically requires a 15% rate of
return on capital expansion projects. Answer the following questions:
1) What is the hurdle rate?
2) Draw Cash flow Diagram of this project.
3) Calculate the present worth of the project.
4) Calculate the future worth of the project.
5) Calculate the annual worth of the project.
6) Calculate the internal rate of return for the project.
Solution
1. the required return on the project is 15% on $750,000, i.e. $112,500 per year
2. the cash inflow for each year is $950,000, for next 10 years.
3. the present worth of the project= 950,000X6.145= 5,837,750
4. future worth of the project= 950,000X15.937= 15,140,150