Table 1

Partial Cash Flow Analysis

0 1 2 3

Land opportunity cost ($500,000)

Building/Equip.cost ($10,000,000)

Net Revenue $5,000,000 $5,150,000 $5,304,500

Less: Labor cost $800,000 $824,000 $848,720

Utilities cost $50,000 $51,500 $53,045

Supplies $2,000,000 $2,060,000 $2,121,800

Incremental overhead $36,000 $37,080 $38,192

Net Income $2,114,000 $2,177,420 $2,242,743

Plus: Net Land salvage Value

Plus: Building/Equip.salvage value

Net Cash Flow $10,500,000 $2,114,00 $2,177,420 $2,242,743

QUESTIONS

1. Complete Table 1 by adding the cash flows for Years 4 and 5.

2. What is the projects payback, NPV, and IRR? Interpret each of these

measures.

3. Suppose that the project would be allocated $10,000 of existing overhead

costs. Should these costs be included in the cash flow analysis? Explain.

4. It is likely that many of the procedures at the outpatient surgery center

would have otherwise been performed at the hospitals inpatient surgery

unit. How should the analysis incorporate the cannibalization of inpatient

surgeries? Would the handling of cannibalization change if you believed that

the local physicians were going to open an outpatient surgery center of

their own? (Only discuss the issues here---no numbers required.)

5. Conduct a scenario analysis. What is its expected NPV? What is the worst and

best case NPVs? How does the worst case value help in assessing the

hospitals ability to bear the risk of this investment?

6. Now assume that the project is judged to have high risk. Furthermore, the

hospitals standard procedure is to use a 3 percentage point risk

adjustment. What is the projects NPV after adjusting for the assessment of

high risk?

7. What is your final recommendation regarding the proposed outpatient surgery