| Course | FIN 419 Finance for Decision Making (FIN/419) |
|---|---|
| Week | 2 |
| Paper type | Capital budgeting analysis paper |
| Length | about 1,001 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Business |
| Updated | October 2026 |
Free sample paper for FIN 419 Week 2
Discounting the Hospital Contract: Cash Flows, Net Present Value, IRR and Payback for Bluewater Linen's $6.5 Million Tunnel Washer Decision, With a Weak-Case Test
[Student Name]
University of Phoenix
FIN/419: Finance for Decision Making
Week 2 Assignment
[Instructor Name]
[Date]
Bluewater Linen Services and all figures are composites written for a model paper; capital budgeting methods and research findings come from the sources listed.
Bluewater Linen Services, the composite Green Bay laundry from Week 1, must answer the hospital system within a month. Week 1 framed the risks and set conditions; this paper puts the contract's cash flows on a timeline and discounts them. The question is no longer whether the contract is attractive in general, but whether the cash it returns, adjusted for timing and risk, exceeds the $6.5 million it requires.
Relevant and Irrelevant Cash Flows
Capital budgeting counts only incremental cash flows, those that change because of the decision. Bluewater paid a consultant $40,000 last year to study tunnel washer options; that cost is sunk and is excluded. The company plans to borrow part of the cost, but interest is also excluded, because the discount rate already reflects the cost of the capital used (Brigham & Ehrhardt, 2022). The cash flows included are the purchase of equipment, the added working capital, the revenue and costs of the contract, the taxes they change, and the value of the equipment and working capital at the end.
The Initial Outlay
The tunnel washer line, dryers and installation cost $5.0 million, and five delivery trucks cost $0.8 million. Added working capital, mainly receivables from the hospital and a larger linen inventory, is $0.7 million. The total outlay at time zero is $6.5 million.
Annual Operating Cash Flow
The contract brings $6.2 million of revenue a year. Variable costs of labor, chemicals, water, energy and delivery fuel are $3.5 million. Added fixed cash costs, including supervisors, maintenance and insurance, are about $786,000. Depreciation on $5.8 million of equipment over seven years, straight line for simplicity, is about $829,000. Operating profit before tax is $6.2 million minus $3.5 million minus $0.786 million minus $0.829 million, or about $1.085 million. After a 25 percent tax, that leaves about $814,000. Adding back depreciation, a noncash expense, gives annual operating cash flow of about $1.643 million.
Terminal Cash Flows
At the end of year seven, Bluewater expects to sell the fully depreciated equipment for about $500,000, which after tax yields $375,000, and to recover the $700,000 of working capital. The year seven cash flow is therefore about $2.718 million.
The Discount Rate
Bluewater's weighted average cost of capital, estimated in Week 4, is about 9 percent. The contract is riskier than the company's average business because of its customer concentration and fixed costs, so the finance manager added two points, using 11 percent. Using a single company-wide rate for projects of different risk would favor risky projects and penalize safe ones, since the proper hurdle is what owners could expect from other uses of money carrying comparable risk (Brealey et al., 2020).
Net Present Value
At the 11 percent rate, the seven years of operating cash flow are worth about $7.74 million, using an annuity factor of 4.712, and the terminal flows of $1.075 million are worth about $518,000. Taking away the $6.5 million outlay leaves about $1.76 million of value created. At the company's 9 percent average rate, it would be about $2.36 million. A positive net present value means the contract is expected to add that much value for the owners beyond their required return.
The Break-Even Rate
The internal rate of return is the rate that makes the discounted inflows exactly match the outlay. For the base case it is about 18.5 percent, well above the 11 percent required return. The internal rate of return is intuitive, but it assumes interim cash flows are reinvested at that same rate and can give conflicting rankings for projects of different size or timing, so it supports rather than replaces net present value.
Payback
Simple payback, the time to recover the outlay from undiscounted cash flows, is just under four years. Discounted payback, using cash flows discounted at 11 percent, is about five and a half years. Both fall within the contract's seven years, but discounted payback shows that the guaranteed four-year term before repricing would not by itself recover the investment.
The Weak Scenario
In the weak case from Week 1, the hospital consolidates sites in year four and volume falls 40 percent. Operating cash flow drops to about $833,000 a year in years four through seven. The contract's value drops below zero, to roughly minus $80,000, and the internal rate of return to about 10.6 percent, just below the required return. In the strong case, with volume 15 percent above plan, net present value rises to about $3.19 million. Across the three cases, weighted 55, 20 and 25 percent, the probability-weighted value comes to about $1.59 million.
What Companies Actually Use
Of the 392 chief financial officers Graham and Harvey (2001) surveyed, roughly 75 percent reported relying on discounted cash flow rules such as present value and the rate of return that zeroes it, while payback remained common, especially at smaller firms and those run by older executives without business degrees. The finding supports using several measures together while letting net present value decide.
Recommendation
The contract creates value in the base and strong cases and an expected net present value of about $1.59 million, so it is likely to add value. Its weakness is concentrated in the risk of a volume drop after year four, when the investment would be only about half recovered on a discounted basis. Bluewater should sign once the hospital accepts either a volume floor or a termination payment equal to the undepreciated equipment value, which would protect the weak case. Without that clause, the decision would rest on the hospital's goodwill.
Conclusion
Discounting the contract's incremental cash flows at a risk-adjusted 11 percent leaves about $1.76 million of added value and a return of roughly 18.5 percent a year on the money invested, with payback inside the term. A weak scenario reduces the value to about zero, which is why the contract's terms matter as much as its forecast.
References
Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw Hill.
Brigham, E. F., & Ehrhardt, M. C. (2022). Financial management: Theory and practice (17th ed.). Cengage.
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7
What the FIN 419 Week 2 instructions ask
FIN 419 Week 2 commonly asks students to evaluate a capital investment using time value of money techniques. Typical requirements include identifying relevant incremental cash flows, including the initial investment, operating cash flows, working capital and terminal value, and excluding sunk costs and financing costs. Students then work out net present value, the internal rate of return and payback, sometimes with a profitability index or modified internal rate of return, explain what each measure shows and recommend whether to accept the project. Many prompts ask for a discount rate that reflects risk and for sensitivity or scenario analysis. Show the cash flow table, state every assumption and give sources for the methods in APA style.
How this FIN 419 Week 2 example is built
The laundry's contract from Week 1 now gets full cash flows, which turns the earlier conditions into numbers. The paper begins by sorting relevant from irrelevant flows: a consultant's study already paid for is excluded, as is interest on the equipment loan. The initial outlay includes the line, the fleet and working capital. Annual operating cash flow is built from revenue, variable and fixed costs, depreciation and taxes. Net present value at an 11 percent rate leads the evaluation, with internal rate of return and both payback measures alongside. The weak scenario from Week 1 is discounted separately. Research on what companies actually use frames the methods, and the recommendation follows from the numbers.
FIN 419 Week 2 grading rubric: where the points go
Instructors grading this week usually look first at whether the cash flows are right. Credit goes to papers that include only incremental cash flows, add back depreciation correctly after taxes, include working capital and its recovery and exclude sunk and financing costs. Accurate arithmetic for each measure follows, with an explanation of why net present value is the primary rule. A discount rate matched to the project's risk and a scenario or sensitivity test earn credit, since a single forecast hides uncertainty. A clear recommendation tied to the analysis, with a cash flow table and APA references, completes the paper.
FIN 419 Week 2 help: mistakes to avoid
The FIN 419 Week 2 error that costs students most is putting interest payments in the project cash flows; the discount rate already accounts for financing. Leave interest out. A second is including sunk costs, such as studies already paid for. Students also forget working capital, both the outlay at the start and the recovery at the end. Another misstep is ranking projects by payback alone, which ignores cash after the cutoff. Use net present value to decide. Discount at a rate that reflects the project's risk, not the firm's average. Show a table of yearly cash flows. Finally, test at least one bad scenario before recommending, and say what contract term or condition would protect the company if it happened.
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FIN 419 Week 2 questions, answered
What does FIN 419 Week 2 usually cover?
It usually covers time value of money applied to capital budgeting: identifying incremental cash flows, computing the main discounted and payback measures, then recommending whether to accept a project.
Where can I find a free FIN 419 Week 2 sample paper?
The laundry's tunnel washer decision, with a full cash flow table, NPV, IRR and payback worked out and annotated, is posted here with no charge to read it. Send your own project for a free first draft.
Why is net present value preferred over payback?
Net present value counts every cash flow, discounts each for time and risk and measures the value added in dollars. Payback ignores cash after the cutoff and the time value of money.
Should interest be included in project cash flows?
No. The discount rate already reflects the cost of financing, so subtracting interest from cash flows would count the cost of capital twice and understate the project's value.
What is a risk-adjusted discount rate?
A rate higher than the firm's average cost of capital, used for projects riskier than the firm's usual business, so that riskier cash flows must clear a higher bar.
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