Due Date 5/25 Competing Technologies with Backfill

1. Explain the term backfill.

2. Consider the base case situation for the first system to be acquired.

a. What are the net present values (NPVs) and internal rates of return (IRRs) of the two alternative

technologies? What factor drives the financial superiority of the more profitable technology?

b. What is the incremental NPV of solid-state versus water perfusion technology? What does the

incremental NPV tell us?

3. Solid-state technology allows for expanded volume. Assess the sensitivity of the decision to the number

of additional tests performed. Assume that the number of additional tests could be as low as

50 or as high as 150. Also, what would be the result if no additional tests were performed?

4. Now consider the backfill assumption. Assess the sensitivity of the decision to the number of additional

bed days. What if the number of additional bed days were as low as 80 or as high as 175? What if no

additional bed days resulted from the backfill opportunity? What is the break-even number of bed days,

that is, the number at which the hospital is indifferent between the two technologies?

5. Do the two systems have the same financial risk? (Put another way, are the cash flows being

discounted equally risky?) If not, why? Modify your analysis to incorporate differential risk if you believe

it exists.

6. What is your final recommendation regarding replacement of the first system?

7. Now consider the second proposed (water perfusion) system acquisition.

a. Should this system be purchased?

b. Explain why and how this analysis differs from the one conducted in question 2.

Three Key learning points

The main case is attached as pictures.