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Medtronic he United

Medtronic he United

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question 6
**Project Overview: Medtronic Inc. and Memorial Hermann Partnership** **Introduction:** Medtronic Inc. has the opportunity to supply medical devices to Memorial Hermann, a private hospital in the United States. The partnership includes an upfront payment and subsequent yearly payments from Memorial Hermann. **Payment and Investment Details:** - **Memorial Hermann Payments:** - $4 million upfront upon signing. - $3 million for the first year. - $1.5 million for the second year. - $7.5 million for the third year. - **Medtronic Investments:** - Loan from Bank of America Merrill Lynch for initial payment. - Invest $2 million at project start. - Running costs: $3.5 million, $10 million, $1.5 million, $4 million, $3 million for years one through five, respectively. **Deliverables and Payment Schedule:** - Medical devices delivered in year four. - Memorial Hermann to pay $4.25 million at end of year four and a $4.5 million balance at the end of year five. **Investment Outcomes and Management Considerations:** - Evaluate the rate of return against the Minimum Attractive Rate of Return (MARR). - Potential outcomes include staff downsizing or plant closures if returns are insufficient. - Medtronic’s project management team to perform an economic analysis. **Project Management Plan:** 1. Generate a table of cash flow estimates. 2. Create a cash flow diagram. 3. Determine possible rates of return. 4. Use Microsoft Excel to calculate rates of return, plotting present worth against return rates (0% to 100%, 5% increments). 5. Evaluate the Internal Rate of Return (IRR) for zero net present worth. 6. MARR set at 15%; assess advisability of the project with a net positive cash flow return of 14%. This structured approach ensures Medtronic’s preparedness and strategic alignment in response to potential economic outcomes of the project.
Transcribed Image Text:**Project Overview: Medtronic Inc. and Memorial Hermann Partnership** **Introduction:** Medtronic Inc. has the opportunity to supply medical devices to Memorial Hermann, a private hospital in the United States. The partnership includes an upfront payment and subsequent yearly payments from Memorial Hermann. **Payment and Investment Details:** - **Memorial Hermann Payments:** - $4 million upfront upon signing. - $3 million for the first year. - $1.5 million for the second year. - $7.5 million for the third year. - **Medtronic Investments:** - Loan from Bank of America Merrill Lynch for initial payment. - Invest $2 million at project start. - Running costs: $3.5 million, $10 million, $1.5 million, $4 million, $3 million for years one through five, respectively. **Deliverables and Payment Schedule:** - Medical devices delivered in year four. - Memorial Hermann to pay $4.25 million at end of year four and a $4.5 million balance at the end of year five. **Investment Outcomes and Management Considerations:** - Evaluate the rate of return against the Minimum Attractive Rate of Return (MARR). - Potential outcomes include staff downsizing or plant closures if returns are insufficient. - Medtronic’s project management team to perform an economic analysis. **Project Management Plan:** 1. Generate a table of cash flow estimates. 2. Create a cash flow diagram. 3. Determine possible rates of return. 4. Use Microsoft Excel to calculate rates of return, plotting present worth against return rates (0% to 100%, 5% increments). 5. Evaluate the Internal Rate of Return (IRR) for zero net present worth. 6. MARR set at 15%; assess advisability of the project with a net positive cash flow return of 14%. This structured approach ensures Medtronic’s preparedness and strategic alignment in response to potential economic outcomes of the project.
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