Capitol Healthplans, Ic., 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 incremental cash flows for the decision are all outflows. Here are the projected flows: Year Method A Method B ($300,000) ($66,000) ($66,000) ($66,000) ($66,000) ($66,000) ($120,000) ($96,000) ($96,000) ($96,000) ($96,000) ($96,000) 1 3 4 5 (a) If the cost of capital of both methods is 9%, which method should be chosen? Why?
Capitol Healthplans, Ic., 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 incremental cash flows for the decision are all outflows. Here are the projected flows: Year Method A Method B ($300,000) ($66,000) ($66,000) ($66,000) ($66,000) ($66,000) ($120,000) ($96,000) ($96,000) ($96,000) ($96,000) ($96,000) 1 3 4 5 (a) If the cost of capital of both methods is 9%, which method should be chosen? Why?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:**Capitol Healthplans, Inc. Evaluation of Home Health Services Methods**
Capitol Healthplans, Inc. is assessing two different methods for providing home health services to its members. Both methods consist of contracting out for services, and the health outcomes and revenues remain unaffected by the chosen method. As a result, the incremental cash flows for these decisions solely represent outflows. Below are the projected cash 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)|
**Question:**
(a) If the cost of capital for both methods is 9%, which method should be chosen? Why?
*Note: The table indicates that both Method A and Method B involve an initial investment at Year 0, followed by consistent annual cash outflows for five years. Method A has a higher initial outflow but lower annual outflows compared to Method B.*
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