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The McKee Clinic, a for-profit entity, is starting a new joint replacement center.  It is expected that the new joint replacement center will generate $1,000,000 per year in net patient revenues for the next five years.  Operating expenses, excluding depreciation, are estimated $500,000 per year.  The initial cost of the joint replacement center building and equipment is estimated at $2,000,000.  The building and equipment will be depreciated over a 5 year life to a cash salvage value of $500,000.  Assume a 30% income tax rate.

What cost of capital % for the project for the project will yield a zero ($0) net present value over a five year period? 

a)            Approximately 8.1%

b)            Approximately 9.6%

c)            Approximately 10.9%

d)            Approximately 11.3%

e)            It is not possible for the project to yield at zero NPV at any cost of capital.

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