Question: 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
| 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? | ||||||||
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