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Scenario 1

CASE 20 Student Version


3/18/2018
CORAL BAY HOSPITAL
Traditional Project Analysis

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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:

Land initial cost $$$$,$$$


Land opportunity cost (and salvage value) $$$$,$$$
Building/equipment cost $$$,$$$,$$$
Build/equipment salvage value $$,$$$,$$$
Procedures per day $$
Average net patient revenue per procedure $$,$$$
Labor costs $$$$,$$$
Utilities costs $$$,$$$
Incremental overhead $$$,$$$
Supply cost ($/procedure) $$$$
Inflation rate on net patient revenue $.$%
Inflation rate on costs $.$%
Tax rate $$.$%
Revenues lost from inpatient surgeries $$,$$$,$$$
Reduction in inpatient surgery costs $$$$,$$$

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Scenario 1
Cost of capital $$.$%
No of days operation $$$

MODEL-GENERATED DATA:

Depreciation Schedule:

MACRS Deprec. End of Year


Year Factor Expense Book value
1 $.$$ $$,$$$,$$$ $$,$$$,$$$
2 $.$$ $,$$$,$$$ $,$$$,$$$
3 $.$$ $,$$$,$$$ $,$$$,$$$
4 $.$$ $,$$$,$$$ $,$$$,$$$
5 $.$$ $,$$$,$$$ $$$,$$$
6 $.$$ $$$,$$$ $

Net Cash Flows:

Project Cash Flows


Year 0 1
Land opportunity cost ($$$$,$$$)
Building/equipment cost ($$,$$$,$$$)
Net patient revenue (including inpatient loss) $$,$$$,$$$
Less: Labor costs $$$,$$$
Cost savings on inpatients ($$$,$$$)
Utilities costs $$,$$$
Supplies $,$$$,$$$
Incremental overhead $$,$$$
Depreciation $,$$$,$$$
Income before taxes $$$$,$$$
Taxes $$$,$$$
Project net income $$$$,$$$
Plus: Depreciation $,$$$,$$$
Plus: Net land salvage value
Plus: Net building/equipment salvage value

Net cash flow ($$$,$$$,$$$) $$,$$$,$$$

Cumulative net cash flow ($$$,$$$,$$$) ($$,$$$,$$$)

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Scenario 1
(For payback calculation)

1. What are the NPV, IRR, MIRR, and payback of the proposed ambulatory surgery center? Do the measures ind
NPV $875,020
IRR $$.$%
MIRR $$.$%
Payback $.$
Yes, the proposal should be accepted as the NPV is positive.

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.

Cost Inflation Net Patient Revenue Inflation


$875,020 0% 1% 2% 3%
0%
1%
2%
3%
4%
5%
6%

(b). What management information is provided by the inflation impact table?


The trend shows that cost inflation has negative impact whereas the revenue inflation has positive impact. Als
than the negative impact of cost inflation. This is because, if the inflation rate is same for cost and revenue an
However if the cost inflation is increasing at a rate higher than the revenue inflation then the NPV starts declin

3. One board member wants to make sure that a complete risk analysis, including sensitivity and scen
(a). Perform a sensitivity analsysis
Sensitivity 1: Profitability and Breakeven Measures based on Cost of Capital
Cost of Capital 10.00% 4.00% 6.00%
Net present value (NPV) $$$$,$$$
Internal rate of return (IRR) $$.$%
Payback $.$ $.$ $.$
MIRR $$.$% $.$% $$.$%
The proposal will be unaceptable for cost of capital more than 12.9%

(b). What management information is provided by the sensitivity analysis?


NPV keeps declining if the cost of capital rises above 10%. Although change in cost of capital will have no im

4. (a) Perform a scenario analysis

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Scenario 1
Scenario 1. Base Case - Cost of capital 10%, Procedures per day 20, net patient revenue per procedur
NPV $$$$,$$$
IRR $$.$%
MIRR $$.$%
Payback $.$

Scenario 2. Cost of capital 14%, Procedures per day 25, net patient revenue per procedure $1,200 and
NPV $$,$$$,$$$
IRR $$.$%
MIRR $$.$%
Payback $.$

Scenario 3. Cost of capital 12%, Procedures per day 15, net patient revenue per procedure $800 and B
NPV ($$,$$$,$$$)
IRR -$.$%
MIRR $.$%
Payback $$$

4. (b) What management information is provided by the scenario analysis?


Senario Analysis shows that procedures perform per day, net revenue per procedure is critical and as the no

4. (c) Why is the expected NPV obtained in the scenario analysis different from the base case NPV?
This is because of change in assumption on procedures per day, cost of capital, net patient revenue per proc

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?

Parameters
Breakeven Values of the Procedures per day
Breakeven Values of the net revenue per procedure
Breakeven Values of the number of days to be operated in the year

5. (b) What management information is provided by the breakeven analysis?


It shows the minimum number of Key Performance Indicator needs to be achieved in order to make project vi
procedure, Number of days in operation

6. To help with the risk-incorporation phase of the analysis, Jules consulted with Mark Hauser, the hos
project and how the hospital typically adjusts for risk.
(a) What is the project's differential risk-adjusted NPV?

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Scenario 1
Cost of Capital Risk Differential
Adjusted NPV
NPV
Base Case - 10% $$$$,$$$
6% $$,$$$,$$$ $$,$$$,$$$
14% ($$$$,$$$) ($$,$$$,$$$)

(b). Assess the corporate risk of the project. (No calculations are required. Think about correlation of
The coefficient of variation reflects the amount of risk taken for every unit of expected return and hence lower
variation of NPV ranges between 1.0 to 2.0, the project seems to be very risky.

7. Jules Bergman is aware that there are some qualitative factors that are relevant to the surgery cent
(a) What qualitative factors might support project acceptance?
Favorable competitive environment will support the assumption considered on procedures per day as well as

(b) What qualitative factors might preclude project acceptance?


Stiff competition may reduce the assumption on procedures per day, reduces net revenue per procedure, incr

(c) Can you think of any costs that might be associated with the project that have not been included in
No. All possible costs have been included. However, one cost that may have been considered is the campaig
this is difficult to assess and build in the model.

(d) Are there any potential benefits that have not been included?
No. All pssoble benefits have been included.

(e) What additional data would you seek from other hospital staff members to conduct a more thoroug
Monthly MIS showing trend of inpatients opting for surgery, actual cost incurred on surgery on a monthly basi

8. Considering all points, would you build the ambulatory surgery center?
It makes sense to build the ambulatory surgery center because it is need of the hour as is seen in the case th
inpatient surgery and hence will have long term impact on Coral Bay Business. Also positive NPV and sensiti
opening the ambulatory surgery center.

9. In your opinion, what are three key learning points from this case?
Project NPV evaluation should consider all necessary variables to evaluate project viability. Discount rate ass
necessary by performing sensitivity and scenario analysis. It is also important to identify the opportunities lost
such loss should also be considered in the evaluation.

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Scenario 1
Copyright 2014 Health
Administration Press

Management, Strategy,
ion, CAPSIM,

determine

appear.

Page 6
Scenario 1

2 3 4 5

$$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$


$$$,$$$ $$$,$$$ $,$$$,$$$ $,$$$,$$$
($$$,$$$) ($$$,$$$) ($$$,$$$) ($$$,$$$)
$$,$$$ $$,$$$ $$,$$$ $$,$$$
$,$$$,$$$ $,$$$,$$$ $,$$$,$$$ $,$$$,$$$
$$,$$$ $$,$$$ $$,$$$ $$,$$$
$,$$$,$$$ $,$$$,$$$ $,$$$,$$$ $,$$$,$$$
($$$$,$$$) $$$$,$$$ $$,$$$,$$$ $$,$$$,$$$
($$$,$$$) $$$,$$$ $$$,$$$ $$$,$$$
($$$$,$$$) $$$$,$$$ $$$$,$$$ $$,$$$,$$$
$,$$$,$$$ $,$$$,$$$ $,$$$,$$$ $,$$$,$$$
$$$,$$$
$,$$$,$$$

$$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$

($$,$$$,$$$) ($$,$$$,$$$) ($$$$,$$$) $$,$$$,$$$

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Scenario 1

center? Do the measures indicate acceptance or rejection of the proposed ambulatory surgery center?

nue Inflation
4% 5% 6%

on has positive impact. Also it is visible that positive impact of revenue inflation is higher
me for cost and revenue and is increasing at same rate than the NPV is also rising.
then the NPV starts declining.

ding sensitivity and scenario analyses, is performed before the proposal is sent to the board.

8.00% 12.00% 14.00%

$.$ $.$ $.$


$$.$% $$.$% $$.$%

st of capital will have no impact on IRR and payback, MIRR will rise and fall with rise and fall of cost of capital respec

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Scenario 1
ent revenue per procedure $1,000 and Build/equipment salvage value $5,000,000

per procedure $1,200 and Build/equipment salvage value $6,000,000

per procedure $800 and Build/equipment salvage value $4,000,000

re is critical and as the no of procedures or net revenue rise or fall the NPV also rises and fall substantially

m the base case NPV?


t patient revenue per procedure and salvage value.

uncertain?

Values Rounded Off


$$.$$$$$$$$$$ $$
$$$.$$$$$$$$$ $$$
$$$.$$$$$$$$$$ $$$

in order to make project viable. In this case the three KPIs are Procedures per day, Net Revenue per

with Mark Hauser, the hospital’s CFO, about both the risk inherent in the hospital's average

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Scenario 1

hink about correlation of the surgery center and hospital cash flows.)
ed return and hence lower the ratio less risky is the project. Since in the given case the coefficient of

evant to the surgery center decision.

cedures per day as well as net revenue per procedure and hence will maintain the project viability

evenue per procedure, increase in demand for supplies leading to rise in cost of supplies

have not been included in the analysis?


considered is the campaign / marketing cost and cost that may be incurred to sustain competition. But

o conduct a more thorough analysis?


surgery on a monthly basis, competitive information using bottoms up approach using staff network.

ur as is seen in the case that the outpatient surgery number is increasing leading to decline in number of
o positive NPV and sensitivity and scenario analysis further makes the case even stronger to go for

viability. Discount rate assumption should be taken carefully and stress testing of the project is
entify the opportunities lost or foregone in lieu of project under consideration and the economic value of

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Scenario 1

st of capital respectively

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Scenario 1

stantially

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INPUT DATA:

Land initial cost $$$$,$$$


Land opportunity cost (and salvage value) $$$$,$$$
Building/equipment cost $$$,$$$,$$$
Build/equipment salvage value $$,$$$,$$$
Procedures per day $$
Average net patient revenue per procedure $$,$$$
Labor costs $$$$,$$$
Utilities costs $$$,$$$
Incremental overhead $$$,$$$
Supply cost ($/procedure) $$$$
Inflation rate on net patient revenue $.$%
Inflation rate on costs $.$%
Tax rate $$.$%
Revenues lost from inpatient surgeries $$,$$$,$$$
Reduction in inpatient surgery costs $$$$,$$$
Cost of capital $$.$%

MODEL-GENERATED DATA:

Depreciation Schedule:

MACRS Deprec. End of Year


Year Factor Expense Book value
1 $.$$ $$,$$$,$$$ $$,$$$,$$$
2 $.$$ $,$$$,$$$ $,$$$,$$$
3 $.$$ $,$$$,$$$ $,$$$,$$$
4 $.$$ $,$$$,$$$ $,$$$,$$$
5 $.$$ $,$$$,$$$ $$$,$$$
6 $.$$ $$$,$$$ $

Net Cash Flows:

Project Cash Flows


Year 0 1
Land opportunity cost ($$$$,$$$)
Building/equipment cost ($$,$$$,$$$)
Net patient revenue (including inpatient loss) $$,$$$,$$$
Less: Labor costs $$$,$$$
Cost savings on inpatients ($$$,$$$)
Utilities costs $$,$$$
Supplies $,$$$,$$$
Incremental overhead $$,$$$
Depreciation $,$$$,$$$
Income before taxes $$,$$$,$$$
Taxes $,$$$,$$$
Project net income $$,$$$,$$$
Plus: Depreciation $,$$$,$$$
Plus: Net land salvage value
Plus: Net building/equipment salvage value

Net cash flow ($$$,$$$,$$$) $$,$$$,$$$

Cumulative net cash flow ($$$,$$$,$$$) ($$,$$$,$$$)


(For payback calculation)

NPV $$,$$$,$$$
IRR $$.$%
MIRR $$.$%
Payback $.$
Yes, the proposal should be accepted as the NPV is positive.
2 3 4 5

$$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$


$$$,$$$ $$$,$$$ $,$$$,$$$ $,$$$,$$$
($$$,$$$) ($$$,$$$) ($$$,$$$) ($$$,$$$)
$$,$$$ $$,$$$ $$,$$$ $$,$$$
$,$$$,$$$ $,$$$,$$$ $,$$$,$$$ $,$$$,$$$
$$,$$$ $$,$$$ $$,$$$ $$,$$$
$,$$$,$$$ $,$$$,$$$ $,$$$,$$$ $,$$$,$$$
$$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$
$$$,$$$ $,$$$,$$$ $,$$$,$$$ $,$$$,$$$
$$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$
$,$$$,$$$ $,$$$,$$$ $,$$$,$$$ $,$$$,$$$
$$$,$$$
$,$$$,$$$

$$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$

($$,$$$,$$$) $$,$$$,$$$ $$,$$$,$$$ $$$,$$$,$$$


INPUT DATA:

Land initial cost $$$$,$$$


Land opportunity cost (and salvage value) $$$$,$$$
Building/equipment cost $$$,$$$,$$$
Build/equipment salvage value $$,$$$,$$$
Procedures per day $$
Average net patient revenue per procedure $$$$
Labor costs $$$$,$$$
Utilities costs $$$,$$$
Incremental overhead $$$,$$$
Supply cost ($/procedure) $$$$
Inflation rate on net patient revenue $.$%
Inflation rate on costs $.$%
Tax rate $$.$%
Revenues lost from inpatient surgeries $$,$$$,$$$
Reduction in inpatient surgery costs $$$$,$$$
Cost of capital $$.$%

MODEL-GENERATED DATA:

Depreciation Schedule:

MACRS Deprec.
Year Factor Expense
1 $.$$ $$,$$$,$$$
2 $.$$ $,$$$,$$$
3 $.$$ $,$$$,$$$
4 $.$$ $,$$$,$$$
5 $.$$ $,$$$,$$$
6 $.$$ $$$,$$$

Net Cash Flows:

Project Cash Flows


Year 0
Land opportunity cost ($$$$,$$$)
Building/equipment cost ($$,$$$,$$$)
Net patient revenue (including inpatient loss)
Less: Labor costs
Cost savings on inpatients
Utilities costs
Supplies
Incremental overhead
Depreciation
Income before taxes
Taxes
Project net income
Plus: Depreciation
Plus: Net land salvage value
Plus: Net building/equipment salvage value

Net cash flow ($$$,$$$,$$$)

Cumulative net cash flow ($$$,$$$,$$$)


(For payback calculation)

NPV ($$,$$$,$$$)
IRR -$.$%
MIRR $.$%
Payback $$$
Yes, the proposal should be rejected as the NPV is negative.
End of Year
Book value
$$,$$$,$$$
$,$$$,$$$
$,$$$,$$$
$,$$$,$$$
$$$,$$$
$

Cash Flows
1 2 3 4 5

$$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$


$$$,$$$ $$$,$$$ $$$,$$$ $,$$$,$$$ $,$$$,$$$
($$$,$$$) ($$$,$$$) ($$$,$$$) ($$$,$$$) ($$$,$$$)
$$,$$$ $$,$$$ $$,$$$ $$,$$$ $$,$$$
$$$,$$$ $$$,$$$ $$$,$$$ $$$,$$$ $$$,$$$
$$,$$$ $$,$$$ $$,$$$ $$,$$$ $$,$$$
$,$$$,$$$ $,$$$,$$$ $,$$$,$$$ $,$$$,$$$ $,$$$,$$$
($$,$$$,$$$) ($$,$$$,$$$) ($$,$$$,$$$) ($$$$,$$$) ($$$$,$$$)
($$$,$$$) ($$$,$$$) ($$$,$$$) ($$$,$$$) ($$$,$$$)
($$$$,$$$) ($$,$$$,$$$) ($$$$,$$$) ($$$$,$$$) ($$$$,$$$)
$,$$$,$$$ $,$$$,$$$ $,$$$,$$$ $,$$$,$$$ $,$$$,$$$
$$$,$$$
$,$$$,$$$

$$,$$$,$$$ $$,$$$,$$$ $$,$$$,$$$ $$$$,$$$ $$,$$$,$$$

($$,$$$,$$$) ($$,$$$,$$$) ($$,$$$,$$$) ($$,$$$,$$$) ($$,$$$,$$$)

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