Risk analysis exercise

Last weeks exercise looked at the financial effects of a computer-based colonoscopy simulation that assisted in training new gastroenterology fellows to perform colonoscopies. The primary financial benefit was assumed to be an increase in revenue from an additional 100 procedures per year. Of these additional colonoscopies, 2% were estimated to require surgery to remove polyps, resulting in greater surgical revenue for the health system as well.

This week, well use the same scenario and the same cash flow projections as last week, but well add sensitivity, scenario and breakeven analyses to help better-understand what factors drive the projected financial success of the project.

Ive provided a spreadsheet with the base-case cash flow projections. Use this spreadsheet to perform your analysis and answer the following questions.

				0	1	2	3	4	5
Assumptions			Additional volume		100	100	100	100	100
Costs			Additional revenue
Simulator cost	$4,000		Additional procedure revenue		$45,000	$45,000	$45,000	$45,000	$45,000
Additional front desk time	10,000		Downstream surgical revenue		$2,000	$2,000	$2,000	$2,000	$2,000
Additional supplies per procedure	$200		Additional costs
Benefits			Simulator purchase	$4,000
Revenue per procedure	$450		Additional front desk time		10,000	10,000	10,000	10,000	10,000
Additional procedures	100		Additional supplies per procedure		$20,000	$20,000	$20,000	$20,000	$20,000
% of procedures requiring future surgery	2%		Net cash flows	($4,000)	$17,000	$17,000	$17,000	$17,000	$17,000
Profits from future surgery	$1,000
Discount rate	8%		NPV	$63,876
			IRR	425%
			Payback period	1 year

1. In your opinion, what are the weakest assumptions made in the financial projections? Is there additional information youd like to have? Theres no right or wrong answer here, and no quantitative analysis needed. I think its good to get used to thinking critically about the assumptions on which financial projections are based.