Chapter 12 Sample Problem and Solution
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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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