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Stumptown Health is evaluating a five-year contract to open a primary care clinic on the campus...

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Finance

Stumptown Health is evaluating a five-year contract to open aprimary care clinic on the campus of a local employer. You aregiven the following information: The initial cost of opening theclinic is $100,000. After that, expected net operating cash flowsequal $30,000 per year. The estimated salvage value of the clinicis $20,000. The estimated discount rate is 10%.
a. Calculate the estimated return on investment (in dollars).Should Stumptown open the clinic? Provide a one-sentencejustification for your answer.

b. Now assume that there could be some error in the estimatedvalues. The net operating cash flows could be as low as $20,000 oras high as $40,000. Furthermore, the salvage value could be as lowas $0 or as high as $30,000. Calculate the estimated return oninvestment (in dollars) under both the worst-case and best-casescenarios. Under each scenario, should Stumptown open the clinic?Provide a one-sentence justification for your answer.

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