Capital 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 affected by the method chosen. Therefore, the net cash flows for the decision are all outflows. Here are the projected flows: Year Method A ($) Method B ($) 0 (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) What is each alternative’s IRR? If the opportunity cost of capital for both methods is 9 percent, which method should be chosen? Why?
Capital 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 affected by the method chosen. Therefore, the net cash flows for the decision are all outflows. Here are the projected flows: Year Method A ($) Method B ($) 0 (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) What is each alternative’s IRR? If the opportunity cost of capital for both methods is 9 percent, which method should be chosen? Why?
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
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9.5 Capital 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 affected by the method chosen.
Therefore, the net cash flows for the decision are all outflows. Here are the projected
flows:
|
Year |
Method A ($) |
Method B ($) |
|
0 |
(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) |
- What is each alternative’s
IRR ? - If the opportunity cost of capital for both methods is 9 percent, which method should be chosen? Why?
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