# Health Financial Management

14.3 Capitol Healthplans, 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 effected by the method chosen. Therefore, the incremental cash flows for the decision are all outflows. Here are the projected flows: Year Method A Method B0 (\$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? 14.4 Great Lakes Clinic has been asked to provide exclusive healthcare services for next year’s World Exposition. Although flattered by the request, the clinic’s managers want to conduct a financial analysis of the project. There will be an up-front cost of \$160,000 to get the clinic in operation. Then, a net cash inflow of \$1 million is expected from operations in each of the two years of the Exposition. However, the clinic has to pay the organizers of the exposition a fee for the marketing value of the opportunity. This fee, which must be paid at the end of the second year, is \$2 million.a. What are the cash flows associated with the project?b. What is the project’s IRR?c. Assuming a project cost of capital of 10 percent, what is the project’s NPV? 14.5 Assume that you are the chief financial officer at Porter Memorial Hospital. The CEO has asked you to analyze two proposed capitalinvestment’s Project X and Project Y. Each project requires a net investment outlay of \$10,000, and the cost of capital for each project is 12 percent. The project’s expected net cash flows are:Year Project X Project Y0 (\$10,000) (\$10,000)1 6,500 3,0002 3,000 3,0003 3,000 3,0004 1,000 3,000 a. Calculate each project’s payback period, net present value (NPV),and internal rate of return (IRR).b. Which project (or projects) is financially acceptable? Explain your answer. 14.6 The director of capital budgeting for Big Sky Health Systems, Inc.,has estimated the following cash flows in thousands of dollars for a proposed new service:Year Expected Net Cash Flow0 (\$100)1 702 503 20The project’s cost of capital is 10 percent.a. What is the project’s payback period?b. What is the project’s NPV?c. What is the project’s IRR? 15.1 The managers of Merton Medical Clinic are analyzing a proposed project. The project’s most likely NPV is \$120,000, but, as evidenced by the following NPV distribution, there is considerable risk involved: Probability NPV0.05 (\$700,000)0.20 (250,000)0.50 120,0000.20 200,0000.05 300,000 a. What are the project’s expected NPV and standard deviation of NPV?b. Should the base case analysis use the most likely NPV or expected NPV? Explain your answer. 15.2 Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities:Year Prob = 0.2 Prob = 0.6 Prob = 0.20 (\$100,000) (\$100,000 (\$100,000)1 20,000 30,000 40,0002 20,000 30,000 40,0003 20,000 30,000 40,0004 20,000 30,000 40,0005 30,000 40,000 50,000 The Year 5 values include salvage value. Heywood’s corporate cost of capital is 10 percent.a. What is the project’s expected (i.e., base case) NPV assuming average risk? (Hint: The base case net cash flows are the expected cash flows in each year.)b. What are the project’s most likely, worst, and best case NPVs?c. What is the projec’s expected NPV on the basis of the scenario analysis?d. What is the project’s standard deviation of NPV?e. Assume that Heywood’s managers judge the project to have lower-than-average risk. Furthermore, the company’s policy is toadjust the corporate cost of capital up or down by 3 percentage points to account for differential risk. Is the project financially attractive? 15.3 Consider the project contained in Problem 14.7 in Chapter 14.a. Perform a sensitivity analysis to see how NPV is affected by changes in the number of procedures per day, average collection …

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