Chapter 12 Sample Problem and Solution

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University of Texas, Rio Grande Valley *

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Finance

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Feb 20, 2024

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UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 12 -- Project Risk Analysis Sample Problem Raleigh Medical Clinic is considering acquiring 2 new ultrasound machines for $300,000. The clinic estimates that the machines will have an economic life of 4 years after which they will have zero salvage value. The machines expects the two machines to generate net revenue of $1,000,000 per year and to require $900,000 per year in fixed costs. The CCC of the clinic is 8 percent. Conduct a sensitivity analysis. ANSWER Step 1 - Assemble the relevant data System cost $0 Revenue $0 Fixed costs $0 CCC 0% Step 2 - Calculate the net cash flows (000s of dollars) 0 1 2 3 4 System cost Net revenue $0 $0 $0 $0 Fixed costs $0 $0 $0 $0 Net income $0 $0 $0 $0 $0 Step 3 - Calculate net present value NPV $0.00 Step 4 - Calculate the NPV with system cost at -20, -10, 0, +10, and + 20 percent of expected System cost: $0.00 In cell C32 insert "=B28" -10% $0 $0.00 Select the range B32:C37 -5% $0 $0.00 From the menu bar choose Data, What-if Analysis, Data Table. 0% $0 $0.00 Row input cell: leave blank 5% $0 $0.00 Column input cell: insert =B15 10% $0 $0.00 Click OK Step 5 - Calculate the NPV with revenue at -20, -10, 0, +10, and + 20 percent of expected Net revenue: $0.00 In cell C41 insert "=B28" -10% $0 $0.00 Select the range B41:C46 -5% $0 $0.00 From the menu bar choose Data, What-if Analysis, Data Table. 0% $0 $0.00 Row input cell: leave blank 5% $0 $0.00 Column input cell: insert =B16
10% $0 $0.00 Click OK Step 6 - Construct a table of data for graph System costNet revenue -10% $0.00 $0.00 -5% $0.00 $0.00 0% $0.00 $0.00 5% $0.00 $0.00 10% $0.00 $0.00 Step 7 - Create graph Step 7 - Interpret graph Copyright © 2020 Foundation of the American College of Healthcare Executives. Not for sale.
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 12 -- Project Risk Analysis Sample Problem Raleigh Medical Clinic is considering acquiring 2 new ultrasound machines for $300,000. The clinic estimates that the machines will have an economic life of 4 years after which they will have zero salvage value. The machines expects the two machines to generate net revenue of $1,000,000 per year and to require $900,000 per year in fixed costs. The CCC of the clinic is 8 percent. Conduct a sensitivity analysis. ANSWER Step 1 - Assemble the relevant data System cost -$300 Revenue $1,000 Fixed costs $900 CCC 8% Step 2 - Calculate the net cash flows (000s of dollars) 0 1 2 3 4 System cost Net revenue $1,000 $1,000 $1,000 $1,000 Fixed costs $900 $900 $900 $900 Net income -$300 $100 $100 $100 $100 Step 3 - Calculate net present value NPV $31.21 A B C D E F G H I 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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