NEED VALUES FILLED IN WHERE IT SAYS -$1, $0, and 1. PLEASE and THANK YOU Shrieves Hospital Ltd. is considering adding a new line to its diagnostic product mix, and the capital
budgeting analysis is being conducted by Sidney Johnson, a recently graduated MHA. A new bone density
scanner would be set up in unused space in Shrieves's main clinic. The machinerys invoice price would be
approximately $200,000; another $10,000 in shipping charges would be required; and it would cost an
additional $30,000 to install the equipment. The machinery has an economic life of four years, and Shrieves
has obtained a special tax ruling which places the equipment in the MACRS three-year class. The machinery
is expected to have a salvage value of $25,000 after four years of use. The new line would generate
incremental sales of 1,250 scans per year for four years at an incremental cost of $100 per scan in the
first year, excluding depreciation. Each scan would generate revenue of $200 in the first year. The price
and cost of each scan are expected to increase by 3 percent per year due to inflation. Further, to handle
the new line, the hospital's net operating working capital would have to increase by an amount equal to 12
percent of sales revenues*. The hospital's tax rate is 40 percent, and its corporate cost of capital is 10
percent.
a. Perform a sensitivity analysis on the corporate cost of capital, number of scans, and salvage value.
Assume that each of these variables can vary from its base case by plus and minus 15 and 30 percent.
Include a sensitivity diagram.
b. Perform a scenario analysis using the worst-, most likely, and best-case probabilities in the table below:
			Number of	Price
	Scenario	Probability	scans	per scan
	Best	25%	1,600	$240
	Most likely	50%	1,250	$200
	Worst	25%	900	$160
c. Assume that Shrieves's average project has a coefficient of variation of NPV in the range of 0.20.4.
The hospital typically adds or subtracts 3 percentage points to its corporate cost of capital to adjust for
risk. Should the new line be accepted?
*
In the section entitled "Changes in Net Working Capital" in Chapter 11, Gapenski states that expansion
projects require additional inventories and accounts receivable which must be financed, just as an increase
in fixed assets must be financed. In this situation, the hospital's net working capital would have to increase
by an amount equal to 12 percent of sales. Sales in Year 1 are estimated at $250,000, so Shrieves must
have (.12 * $250,000 =) $30,000 in net working capital at Year 0. If sales increase to $257,500 in Year 2,
Shrieves must have (.12 * $257,500 =) $30,900 at Year 1. Because it already has $30,000 of net working
capital on hand, its net investment in working capital at Year 1 is just ($30,900 - $30,000 =) $900. If sales
increase to $265,225 in Year 3, its net investment in working capital in Year 2 is (.12 * 265,225 =)
$31, 827 - $30,900 = $927. If sales increase to $273,182 in Year 4, its net investment in working capital
in Year 3 is (.12 * 273,182 =) $32,782 - $31,827 = $955. Shrieves will have no sales after Year 4, so it will
require no working capital at Year 4. Thus, it would have a positive cash flow of $32,782 at Year 4 as
working capital is sold but not replaced. DON'T HARD CODE THESE NUMBERS!
ANSWER
Equipment cost			-$1		Number of scans			0
Shipping charge			-$1		Price per scan			$1
Installation charge			-$1		Cost per scan			-$1
Pretax equipment salvage value			$1		Inventory/sales			-1%
Tax rate			-1%		Annual inflation rate			1%
Corporate cost of capital			1%
MACRS recovery allowances					1%	1%	1%	1%
				0	1	2	3	4
Equipment cost				$0	$0	$0	$0	$0
Sales					$0	$0	$0	$0
Less:	Costs				$0	$0	$0	$0
	Depreciation				$0	$0	$0	$0
Operating income before taxes					$0	$0	$0	$0
Taxes					$0	$0	$0	$0
Net operating income after taxes					$0	$0	$0	$0
Less: Investment in working capital				$0	$0	$0	$0	$0
Plus: Depreciation					$0	$0	$0	$0
Plus: After-tax equipment salvage value*								$0
Net cash flow				$0	$0	$0	$0	$0
*
Pretax equipment salvage value				$0
MACRS equipment salvage value				$0
Difference				$0
Taxes				$0
After-tax equipment salvage value				$0
NPV	$0
IRR	$0
MIRR	$0
a.
Change
from		Number	Salvage
Base Case	CCC	of scans	value
-30%	0.0%	0	$0
-15%	0.0%	0	$0
0%	0.0%	0	$0
15%	0.0%	0	$0
30%	0.0%	0	$0
Change		NPV
from		Number	Salvage
Base Case	CCC	of scans	value
-30%	$0	$0	$0
-15%	$0	$0	$0
0%	$0	$0	$0
15%	$0	$0	$0
30%	$0	$0	$0
		GRAPH
b.
Change the number of scans and price per scan in cells I51 and I52 to the values in the table below and
you will obtain the NPVs in the far right column in the table below.
		Number	Price
Scenario	Probability	of scans	per scan	NPV
Best case	0%	0	$0	$0
Base case	0%	0	$0	$0
Worst case	0%	0	$0	$0
c.
Here are the expected NPV and standard deviation of the scenario analysis:
E(NPV)	$0
Variance	$0
St dev	$0
CV	0.0