15.3 Consider the project contained in Problem 14.7 in Chapter 14. (See chart below.)

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.

b. Conduct a scenario analysis suppose that the hospitals staff concluded that the three most uncertain variables were the number of procedures per day, average collection amount, and the equipments salvage value. Furthermore, the following data were developed:

cenario	Probability	Procedures	Collection	salvage value
Worst	0.25	10	60	100,000
Most Likely	0.5	15	80	200,000
Best	0.25	20	100	300,000

c. Finally, assume that California Health Centers average project has a coefficient of variation of NPV in the range of 1.0 2.0. The hospital adjusts for risk by adding or subtracting 3% points to its 10% 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 hospitals managers?

Information from 14.7-

1)

	0	1	2	3	4	5
Equipment Cost	-600000
Net revenues		300000	315000	330750.00	347287.50	364651.88
Less: Labor maintenance		-100000	-105000	-110250.00	-115762.50	-121550.63
Utlities Costs		-10000	-10500	-11025.00	-11576.25	-12155.06
Incremental overhead		-5000	-5250	-5512.50	-5788.13	-6077.53
Supplies		-18750	-19687.50	-20671.88	-21705.47	-22790.74
Depreciation		(120,000.00)	(192,000.00)	(114,000.00)	(72,000.00)	(66,000.00)
Operating incmoe		27750.00	-10462.50	41574.38	72273.09	81646.75
Equipment salvage value						134400
Net cash flows	-600000	147,750.00	181,537.50	155,574.38	144,273.09	282,046.75

2)

NPV	$74,903.81
IRR	14.40%