a nursing home that is currently earning $2.0 million in cash flow

6. Beverly Enterprises owns a nursing home that is currently earning $2.0 million in cash flow on an annual basis, but this amount is expected to drop in the future. The nursing home has a book value of $20 million, a replacement cost of $40 million, and a current sale value of $10 million. If Beverly Enterprises has a cost of capital equal to 15 percent, at what value of annual cash flow would Beverly Enterprises be likely to sell the nursing home?

A. $1,500,000

B. $2,000,000

C. $4,000,000

Significant new investments

5. In 20X4, Olentangy Health Care (OHC)’s cost of capital was 6%. Its investments on a historical cost valuation basis are $80,000, on a replacement cost basis are $100,000, and on a current market value basis are $110,000. If you were on OHC’s board, what minimum level of annual cash flow would you require in order to continue operations and proceed with planned significant new investments?

$6,000. Significant new investments should be made only if the return based on replacement cost is greater than the firm’s cost of capital. So, what cash flow, when divided $100,000, gives 6%.

A. $4,800

B. $6,000

C. $6,600

D. $8,000