Medtronic he United
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question 6
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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