CORAL BAY HOSPITAL

Cases in Healthcare Finance, 5th Edition Copyright 2014 Health Administration Press 12/6/2013 CASE 20 QUESTIONS CORAL BAY HOSPITAL Traditional Project Analysis 1. What are the NPV, IRR, MIRR, and payback of the proposed ambulatory surgery center? Do the measures indicate acceptance or rejection of the proposed ambulatory surgery center? 2. Inflation is one of the most difficult factors to deal with in project analysis. a. Complete the inflation impact table shown in Exhibit 20.2. b. What management information is provided by the inflation impact table? 3. One board member wants to make sure that a complete risk analysis, including sensitivity and scenario analyses, is performed before the proposal is sent to the board. a. Perform a sensitivity analysis. b. What management information is provided by the sensitivity analysis? 4. a. Perform a scenario analysis. b. What management information is provided by the scenario analysis? c. Why is the expected NPV obtained in the scenario analysis different from the base case NPV? 5. A board member is interested in the utilization breakeven of the Center. a. What are the breakeven values of the three input variables that are highly uncertain? b. What management information is provided by the breakeven analysis? 6. To help with the risk-incorporation phase of the analysis, Jules consulted with Mark Hauser, the hospital’s CFO, about both the risk inherent in the hospital’s average project and how the hospital typically adjusts for risk. a. What is the project’s differential risk-adjusted NPV? b. Assess the corporate risk of the project. (No calculations are required. Think about correlation of the surgery center and hospital cash flows.) 7. Jules Bergman is aware that there are some qualitative factors that are relevant to the surgery center decision. a. What qualitative factors might support project acceptance? b. What qualitative factors might preclude project acceptance? c. Can you think of any costs that might be associated with the project that have not been included in the analysis? d. Are there any potential benefits that have not been included? e. What additional data would you seek from other hospital staff members to conduct a more thorough analysis? 8. Considering all points, would you build the ambulatory surgery center? 9. In your opinion, what are three key learning points from this case?

CASE19

CASE 20 Student Version Copyright 2014 Health Administration Press
7/13/16
CORAL BAY HOSPITAL
Traditional Project Analysis
This case illustrates a complete capital budgeting analysis, including cash flow analysis
and profitability measures. Note the model extends to Column I.
The model consists of a complete base case analysis—no changes need to be made
to the existing MODEL-GENERATED DATA section. However, all values in the student
version INPUT DATA section have been replaced with zeros. Thus, students must determine
the appropriate input values and enter them into the model. These cells are colored red.
When this is done, any error cells will be corrected and the base case solution will appear.
Note that the student version does not contain any risk analyses, so students will have to
create their own if required by the case. Furthermore, students must create their own
graphics (charts) as needed to present their results.
INPUT DATA: KEY OUTPUT:
Land initial cost $150,000 NPV $875,020
Land opportunity cost (and salvage value) $200,000 IRR 12.9% compare to cost of capital
Building/equipment cost $10,000,000 MIRR 11.8%
Build/equipment salvage value $5,000,000 Payback 4.1 Years to getting profit break even
Procedures per day 20 can be tried with 25,and 15
Average net patient revenue per procedure $1,000
Labor costs $918,000
Utilities costs $50,000
Incremental overhead $36,000
Supply cost ($/procedure) $200
Inflation rate on net patient revenue 3.0%
Inflation rate on costs 3.0% tray 6% for different scenario analysis
Tax rate 40.0%
Revenues lost from inpatient surgeries $1,000,000
Reduction in inpatient surgery costs $500,000
Cost of capital 10.0% tray 14% and 4%for different scenario analysis
MODEL-GENERATED DATA:
Depreciation Schedule:
MACRS Deprec. End of Year
Year Factor Expense Book value
1 0.20 $2,000,000 $8,000,000
2 0.32 3,200,000 4,800,000
3 0.19 1,900,000 2,900,000
4 0.12 1,200,000 1,700,000
5 0.11 1,100,000 600,000
6 0.06 600,000 0
Net Cash Flows:
Project Cash Flows
0 1 2 3 4 5
Land opportunity cost ($200,000)
Building/equipment cost (10,000,000)
Net patient revenue (including inpatient loss) $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035
Less: Labor costs 918,000 945,540 973,906 1,003,123 1,033,217
Cost savings on inpatients (500,000) (515,000) (530,450) (546,364) (562,754)
Utilities costs 50,000 51,500 53,045 54,636 56,275
Supplies 1,000,000 1,030,000 1,060,900 1,092,727 1,125,509
Incremental overhead 36,000 37,080 38,192 39,338 40,518
Depreciation 2,000,000 3,200,000 1,900,000 1,200,000 1,100,000
Income before taxes $496,000 ($629,120) $748,006 $1,527,447 $1,709,270
Taxes 198,400 (251,648) 299,203 610,979 683,708
Project net income $297,600 ($377,472) $448,804 $916,468 $1,025,562
Plus: Depreciation 2,000,000 3,200,000 1,900,000 1,200,000 1,100,000
Plus: Net land salvage value 180,000
Plus: Net building/equipment salvage value 3,240,000
Net cash flow ($10,200,000) $2,297,600 $2,822,528 $2,348,804 $2,116,468 $5,545,562
Cumulative net cash flow ($10,200,000) ($7,902,400) ($5,079,872) ($2,731,068) ($614,600) $4,930,962
(For payback calculation)
Profitability and Breakeven Measures:
Net present value (NPV) $875,020
Internal rate of return (IRR) 12.9%
Modified IRR (MIRR) 11.8%
Payback 4.1
END

Sheet1

CASE 20 Student Version Copyright 2014 Health Administration Press
7/13/16
CORAL BAY HOSPITAL
Traditional Project Analysis
This case illustrates a complete capital budgeting analysis, including cash flow analysis
and profitability measures. Note the model extends to Column I.
The model consists of a complete base case analysis—no changes need to be made
to the existing MODEL-GENERATED DATA section. However, all values in the student
version INPUT DATA section have been replaced with zeros. Thus, students must determine
the appropriate input values and enter them into the model. These cells are colored red.
When this is done, any error cells will be corrected and the base case solution will appear.
Note that the student version does not contain any risk analyses, so students will have to
create their own if required by the case. Furthermore, students must create their own
graphics (charts) as needed to present their results.
INPUT DATA: KEY OUTPUT:
Land initial cost $150,000 NPV $875,020
Land opportunity cost (and salvage value) $200,000 IRR 12.9% compare to cost of capital
Building/equipment cost $10,000,000 MIRR 11.8%
Build/equipment salvage value $5,000,000 Payback 4.1 Years to getting profit break even
Procedures per day 20
Average net patient revenue per procedure $1,000
Labor costs $918,000
Utilities costs $50,000
Incremental overhead $36,000
Supply cost ($/procedure) $200
Inflation rate on net patient revenue 3.0%
Inflation rate on costs 3.0%
Tax rate 40.0%
Revenues lost from inpatient surgeries $1,000,000
Reduction in inpatient surgery costs $500,000
Cost of capital 10.0%
MODEL-GENERATED DATA:
Depreciation Schedule:
MACRS Deprec. End of Year
Year Factor Expense Book value
1 0.20 $2,000,000 $8,000,000
2 0.32 3,200,000 4,800,000
3 0.19 1,900,000 2,900,000
4 0.12 1,200,000 1,700,000
5 0.11 1,100,000 600,000
6 0.06 600,000 0
Net Cash Flows:
Project Cash Flows
0 1 2 3 4 5
Land opportunity cost ($200,000)
Building/equipment cost (10,000,000)
Net patient revenue (including inpatient loss) $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035
Less: Labor costs 918,000 945,540 973,906 1,003,123 1,033,217
Cost savings on inpatients (500,000) (515,000) (530,450) (546,364) (562,754)
Utilities costs 50,000 51,500 53,045 54,636 56,275
Supplies 1,000,000 1,030,000 1,060,900 1,092,727 1,125,509
Incremental overhead 36,000 37,080 38,192 39,338 40,518
Depreciation 2,000,000 3,200,000 1,900,000 1,200,000 1,100,000
Income before taxes $496,000 ($629,120) $748,006 $1,527,447 $1,709,270
Taxes 198,400 (251,648) 299,203 610,979 683,708
Project net income $297,600 ($377,472) $448,804 $916,468 $1,025,562
Plus: Depreciation 2,000,000 3,200,000 1,900,000 1,200,000 1,100,000
Plus: Net land salvage value 180,000
Plus: Net building/equipment salvage value 3,240,000
Net cash flow ($10,200,000) $2,297,600 $2,822,528 $2,348,804 $2,116,468 $5,545,562
Cumulative net cash flow ($10,200,000) ($7,902,400) ($5,079,872) ($2,731,068) ($614,600) $4,930,962
(For payback calculation)
Profitability and Breakeven Measures:
Net present value (NPV) $875,020
Internal rate of return (IRR) 12.9%
Modified IRR (MIRR) 11.8%
Payback 4.1
END
 
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