Capital (Equipment) Cost Data: Water Perfusion Technology:

Water Solid NPV $30,539

Perfusion State IRR 44.5%

Computer workstation $25,000 $25,000

Catheters (9) 4,500 54,000 Solid State Technology:

Volume, Revenue, and Operating Cost Data per Test: W/O Backfill W/ Backfill

NPV ($12,957) $163,157

Volume 200 300 IRR 3.5% 74.0%

Net revenue $250 $250

Labor costs $150 $150 Incremental SS Versus WP with Backfill:

Medical supply costs

Current WP system $30 $30 NPV $132,618

New system $15 $30 IRR 90.7%

Administrative supply costs

Current WP system $15 $15 Replace Second System:

New system $10 $15

NPV ($3,490)

Backfill Data:

Volume (bed days) 100

Contribution margin:

Per motility test bed-day $40

Per medicine bed-day $520

Other Data:

Project cost of capital 10.0% 10.0%

Inflation rate (for all) 3.0%

Market value of serviceable $10,000

(second) workstation

MODEL-GENERATED DATA:

New System Using Water Perfusion Technology:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Computer workstation ($25,000)

Catheters ($4,500)

Net revenue $50,000 $51,500 $53,045 $54,636 $56,275

Variable costs 35,000 36,050 37,132 38,245 39,393

Net cash flow ($29,500) $15,000 $15,450 $15,914 $16,391 $16,883

Net present value (NPV) $30,539

Internal rate of return (IRR) 44.5%

New System Using Solid State Technology:

Without Backfill Effects:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Computer workstation ($25,000)

Catheters ($54,000)

Net revenue $75,000 $77,250 $79,568 $81,955 $84,413

Variable costs 58,500 60,255 62,063 63,925 65,842

Net cash flow ($79,000) $16,500 $16,995 $17,505 $18,030 $18,571

Net present value (NPV) ($12,957)

Internal rate of return (IRR) 3.5%

With Backfill Effects:

Net cash flow w/o backfill ($79,000) $16,500 $16,995 $17,505 $18,030 $18,571

Plus: Backfill cash flow 44,000 45,320 46,680 48,080 49,522

($79,000) $60,500 $62,315 $64,184 $66,110 $68,093

Net present value (NPV) $163,157

Internal rate of return (IRR) 74.0%

Combined (Incremental) Analysis of Solid-State Versus Water Perfusion Technology

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Incremental cost ($49,500)

Incremental op. cash flows $45,500 $46,865 $48,271 $49,719 $51,211

Net cash flow ($49,500) $45,500 $46,865 $48,271 $49,719 $51,211

Net present value (NPV) $132,618

Internal rate of return (IRR) 90.7%

Replace Second System with Water Perfusion Technology System:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Computer workstation ($25,000)

Catheters ($4,500)

Old machine salvage value $10,000

Variable cost savings $4,000 $4,120 $4,244 $4,371 $4,502

Net cash flow ($19,500) $4,000 $4,120 $4,244 $4,371 $4,502

Net present value (NPV) ($3,490)

Here are the questions:

1. What are the NPVs and IRRs of the two alternatives? What is the key factor for the more profitable alternative? 2. What is the incremental NPV of solid state versus water perfusion technology? 3. Do the two systems have the same financial risk? If not, why not? How can you modify your analysis to incorporate this differential risk? 4. What is your recommendation? Positive NPV and IRR over 5 years; Inpatient space opportunity; Center reputation; Training / Growth opportunities

This is from the Jones Memorial Hospital case study. These questions were not answered. Please post the answer. ''

1. What are the NPVs and IRRs of the two alternatives? What is the key factor for the more profitable alternative?

2. What is the incremental NPV of solid state versus water perfusion technology?

3. Do the two systems have the same financial risk? If not, why not? How can you modify your analysis to incorporate this differential risk?

4. What is your recommendation? Positive NPV and IRR over 5 years; Inpatient space opportunity; Center reputation; Training / Growth opportunities