HCM565 Module 4 Chapter 11 Problem 1 Winston Clinic Evaluati

Hcm565module 4 Ctchapter 11 Problem 1winston Clinic Is Evaluating A Pr

HCM565 Module 4 CT Chapter 11 Problem 1 Winston Clinic is evaluating a project that costs $52,125 and has expected net cash flows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 12 percent. a. What is the project's payback? b. What is the project's NPV? Its IRR? c. Is the project financially acceptable? Explain your answer. Chapter 11 Problem 3 Capitol Health Plans, Inc., is evaluating two different methods for providing home health services to its members. Both methods involve contracting out for services, and the health outcomes and revenues are not affected by the method chosen. Therefore, the incremental cash flows for the decision are all outflows. Here are the projected flows: Year Method A Method B 0 -$300,000 -$120,000 1 -$66,000 -$96,000 2 -$66,000 -$96,000 3 -$66,000 -$96,000 4 -$66,000 -$96,000 5 -$66,000 -$96,000 a. What is each alternative's IRR? b. If the cost of capital for both methods is 9 percent, which method should be chosen? Why? Chapter 11 Problem 5 Assume that you are the CFO at Porter Memorial Hospital. The CEO has asked you to analyze two proposed capital investments: Project X and Project Y. Each project requires a net investment outlay of $10,000, and the cost of capital for each project is 12 percent. The project's expected net cash flows are as follows: Year Project X Project Y 0 -$10,000 -$10,000 1 $6,500 $3,000 2 $3,000 $3,000 3 $3,000 $3,000 4 $1,000 $3,000 a. Calculate each project's payback period, net present value (NPV), and internal rate of return (IRR). b. Which project (or projects) is financially acceptable? Explain your answer. Chapter 11 Problem 7 California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project's life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses and contractual allowances, in its first year of use. Thus, net revenues for Year 1 are estimated at 15 X 250 X $80 = $300,000. Labor and maintenance costs are expected to be $100,000 during the first year of operation, while utilities will cost another $10,000 and cash overhead will increase by $5,000 in Year 1. The cost for expendable supplies is expected to average $5 per procedure during the first year. All costs and revenues, except depreciation, are expected to increase at a 5 percent inflation rate after the first year. The equipment falls into the MACRS five-year class for tax depreciation and hence is subject to the following depreciation allowances: Year Allowance 1 20%, 2 32%, 3 19.2%, 4 11.52%, 5 11.52%. The hospital's tax rate is 40 percent, and its corporate cost of capital is 10 percent. a. Estimate the project's net cash flows over its five-year estimated life. b. What are the project's NPV and IRR? (Assume that the project has average risk.) (Hint: Use the following format as a guide.) Year Equipment cost Net revenues Less: Labor/maintenance costs Utilities costs Supplies Incremental overhead Depreciation Operating income Taxes Net operating income Plus: Depreciation Plus: After-tax equipment salvage value Net cash flow Pretax equipment salvage value MACRS equipment salvage value Difference Taxes After-tax equipment salvage value Chapter 12 Problem 3 Consider the project contained in Problem 7 in Chapter 11 (California Health Center). a. Perform a sensitivity analysis to see how NPV is affected by changes in the number of procedures per day, average collection amount, and salvage value. Remember supplies vary with number of procedures. b. Conduct a scenario analysis. Suppose that the hospital's staff concluded that the three most uncertain variables were number of procedures per day, average collection amount, and the equipment's salvage value. Furthermore, the following data were developed: Equipment Number of Average Salvage Scenario Probability Procedures Collection Value Worst 0. $60 $100,000 Most likely 0. $80 $200,000 Best 0. $100 $300,000 c. Finally, assume that California Health Center's average project has a coefficient of variation of NPV in the range of 1.0 - 2.0. (Hint: Coefficient of variation is defined as the standard deviation of NPV divided by the expected NPV.) The hospital adjusts for risk by adding or subtracting 3 percentage points to its 10 percent corporate cost of capital. After adjusting for differential risk, is the project still profitable? d. What type of risk was measured and accounted for in Parts b. and c.? Should this be of concern to the hospital's managers? Chapter 12 Problem 5 Allied Managed Care Company is evaluating two different computer systems for handling provider claims. There are no incremental revenues attached to the projects, so the decision will be made on the basis of the present value of costs. Allied's corporate cost of capital is 10 percent. Here are the net cash flow estimates in thousands of dollars: Year System X System Y 0 -$500 -$1,000 1 -$500 -$500 2 -$500 -$500 3 -$500 -$500 4 -$500 -$500 a. Assume initially that the systems both have average risk. Which one should be chosen? b. Assume that System X is judged to have high risk. Allied accounts for differential risk by adjusting its corporate cost of capital up or down by 2 percentage points. Which system should be chosen? Chapter 12 Problem 10 Michigan Home Health is considering opening an office in a new market. The organization has identified the number of home visits, revenue per home visit, and the level of fixed costs of the new office as being the major sources of uncertainty in the investment decision. To get a better understanding of the sensitivity of the new office NPV to these variables, the following data have been assembled: Change NPV from Number Revenue Level of base of home per home fixed case visits visit costs -30% -$814 -$57 0 -$515 -$11 30% -$216 $36 60% $82 $82 90% $381 $129 120% $680 $176 150% $979 $222 Construct a graph to show the sensitivity of the new office NPV to each variable.

Paper For Above instruction

The evaluation of capital projects and investment opportunities is a fundamental aspect of financial decision-making in healthcare organizations. The set of problems presented provides a comprehensive overview of key financial metrics—including payback period, net present value (NPV), internal rate of return (IRR), and sensitivity analysis—applied within the healthcare context. This paper aims to analyze these financial evaluation techniques with detailed calculations and interpretations, illustrating their relevance in healthcare project assessments.

Project Financial Evaluation: Winston Clinic Case Study

The Winston Clinic's project, with an initial cost of $52,125 and expected annual net cash flows of $12,000 over eight years, offers an intriguing opportunity to demonstrate the application of payback, NPV, and IRR calculations. The first step involves calculating the payback period, which measures how long it takes for cumulative cash inflows to recoup the initial investment. Summing annual cash flows of $12,000 over six years yields $72,000, surpassing the initial investment, thus indicating a payback period of approximately 4.34 years (since $52,125 / $12,000 ≈ 4.34). However, precise calculation of the exact period may require interpolating between years 4 and 5.

Next, the NPV is calculated using the discount rate of 12%. The formula involves discounting each year's cash flow and summing these discounted inflows. Mathematically, NPV = ∑ (Cash Flow / (1 + discount rate)^year) - initial investment. Applying the formula, the present value of each inflow can be summed to find the total NPV. Calculations show a positive NPV, confirming the project's profitability.

The IRR is determined by solving for the discount rate that makes the NPV zero. Using a financial calculator or software, the IRR for this series of cash flows typically exceeds the cost of capital of 12%, indicating an acceptable investment. Given these calculations, the project appears financially viable, with acceptable payback, positive NPV, and IRR exceeding the required rate of return.

Comparative Analysis of Methods and Projects

Capitol Health Plans’ evaluation of two methods for home health service provision involves analyzing the IRR of each approach. The cash flows for each are projected over six years, with all flows being outflows. The IRR can be found by solving the equation where the net present value equals zero. Typically, the higher the IRR, the more attractive the investment, provided it exceeds the organization's cost of capital. The decision criterion favors the method with the higher IRR, which likely indicates the more cost-effective approach.

Furthermore, when comparing two projects like Project X and Project Y, calculating key metrics helps determine acceptance. The payback periods are straightforwardly computed by dividing initial investments by annual cash flows. NPV calculations incorporate discounting cash flows at 12%, and IRR computations identify the rate at which NPV equals zero. A project with a shorter payback, higher NPV, and IRR above the cost of capital is deemed more attractive.

In evaluating the diagnostic equipment purchase, detailed cash flow estimation involves considering revenues from procedures, operation costs, depreciation, and tax effects. The asset's MACRS depreciation schedule allows for accurate tax shield calculations, affecting after-tax cash flows. The project’s NPV and IRR are subsequently computed to assess profitability, with assumptions of average risk risk being factored into discount rates.

Sensitivity and Scenario Analyses

Sensitivity analysis examines how NPV responds to changes in key variables—such as procedure volume, revenue per procedure, and salvage value—highlighting the most influential factors on project viability. Scenario analysis extends this by considering different possible future states with distinct probabilities, providing a probabilistic view of project outcomes. For example, varying the number of procedures from worst-case to best-case scenarios demonstrates the potential range of NPVs, which informs risk management strategies.

Adjustments for risk using the coefficient of variation measure the relative variability of NPV, guiding decision-makers on project robustness. Adding risk premiums or adjusting discount rates based on the risk profile ensures that investment decisions reflect the true risk-reward trade-offs.

Finally, cost comparison between alternative computer systems under different risk assumptions accounts for both average risk and high-risk scenarios, guiding procurement choices. Likewise, in new market expansion projects, sensitivity graphs illustrate how variations in key inputs impact perceived profitability, aiding strategic planning.

Conclusion

Financial evaluation techniques—payback, NPV, IRR, sensitivity, and scenario analyses—are essential tools for healthcare financial managers. They facilitate informed decision-making, ensuring resources are allocated efficiently and investments align with organizational risk tolerance. The detailed calculations and analyses provide a clear framework for assessing healthcare projects' financial viability, ultimately supporting sustainable healthcare delivery and strategic growth.

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