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Medtronic Inc. has an opportunity to supply medical devices to Memorial Hermann, a private hospital in the United States. Memorial Hermann will pay $4 million upfront i.e. when the contract is signed and $3 million for the first year, $1.5 million for the second year and $7.5 million for the third had obtained loan from Bank of America Merrill Lynch (an investment bank) prior to the initial payment from Hermann and invest $2 million from it at the beginning of the project. Subsequently, Medtronic spend $3.5 million, $10 million, $1.5 million, 4 million, and $3 million as running cost for the first, second, third, fourth and fifth year respectively. Memorial Hermann will take delivery of the medical devices during year 4, and agrees to pay $4.25 million at the end of that year and the $ 4.5 million balance at the end of year 5. The outcome of the rate of return on this investment as compare with the minimum attractive rate of return (MARR) will determine if Medtronic will continue to sustain their current staff strength or they will cede to the option of downsizing after the completion of the 5 year deal. Medtronic management request her project management team to conduct an economic analysis on the proposed venture (project) so that they can be better informed on policy formulation in readiness for any exigency that may result from the project. These exigencies include but not limited to staff downsizing, staff retainment, salary freezing, and salary cut or closing down some of their plants since they are multinational company. The project management team is planning to approach the task as follows: year. Medtronic 1. Generate a table depicting the cash flow estimates for the Project

Medtronic Inc. has an opportunity to supply medical devices to Memorial Hermann, a private hospital in the United States. Memorial Hermann will pay $4 million upfront i.e. when the contract is signed and $3 million for the first year, $1.5 million for the second year and $7.5 million for the third had obtained loan from Bank of America Merrill Lynch (an investment bank) prior to the initial payment from Hermann and invest $2 million from it at the beginning of the project. Subsequently, Medtronic spend $3.5 million, $10 million, $1.5 million, 4 million, and $3 million as running cost for the first, second, third, fourth and fifth year respectively. Memorial Hermann will take delivery of the medical devices during year 4, and agrees to pay $4.25 million at the end of that year and the $ 4.5 million balance at the end of year 5. The outcome of the rate of return on this investment as compare with the minimum attractive rate of return (MARR) will determine if Medtronic will continue to sustain their current staff strength or they will cede to the option of downsizing after the completion of the 5 year deal. Medtronic management request her project management team to conduct an economic analysis on the proposed venture (project) so that they can be better informed on policy formulation in readiness for any exigency that may result from the project. These exigencies include but not limited to staff downsizing, staff retainment, salary freezing, and salary cut or closing down some of their plants since they are multinational company. The project management team is planning to approach the task as follows: year. Medtronic 1. Generate a table depicting the cash flow estimates for the Project

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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**Opportunity Analysis for Medtronic Inc. to Supply Medical Devices** Medtronic Inc. has an opportunity to supply medical devices to Memorial Hermann, a private hospital in the United States. The project involves a series of payments and expenses over a five-year period, with Memorial Hermann paying $4 million upfront and subsequent payments over three years. Below is a detailed analysis and approach planned by the project management team: **Project Financial Overview:** - **Initial Payments:** - $4 million upfront from Memorial Hermann. - $3 million for the first year. - $1.5 million for the second year. - $7.5 million for the third year. - **Investment and Running Costs:** - Loan from Bank of America Merrill Lynch for $2 million, invested at the project's start. - Medtronic will spend: - $3.5 million in Year 1. - $10 million in Year 2. - $1.5 million in Year 3. - $4 million in Year 4. - $3 million in Year 5. - **Delivery and Final Payments:** - Medical devices delivered in Year 4. - Memorial Hermann pays $4.25 million at the end of Year 4 and $4.5 million at the end of Year 5. **Project Evaluation Process:** 1. **Generate Cash Flow Estimates:** - Create a table outlining cash flow estimates for the project. 2. **Create a Cash Flow Diagram:** - Visual representation of cash inflows and outflows over the project’s duration. 3. **Evaluate Rates of Return:** - Determine potential rates of return the project is likely to achieve. 4. **Rate of Return Calculation:** - Use Microsoft Excel to obtain present worth plotted against various rate of return values (0% to 100%, with increments of 5%). 5. **Calculate Internal Rate of Return (IRR):** - Find the IRR for zero net present worth using Excel. 6. **Decision-Making Criteria:** - Medtronic management has set a Minimum Attractive Rate of Return (MARR) of 15% for projects. - Evaluate project feasibility against a reinvestment rate of 14% and a loan cost of 7%. **Management Implications:** - The project’s outcome is crucial for decisions on staffing and operation of plants. Management
Transcribed Image Text:**Opportunity Analysis for Medtronic Inc. to Supply Medical Devices** Medtronic Inc. has an opportunity to supply medical devices to Memorial Hermann, a private hospital in the United States. The project involves a series of payments and expenses over a five-year period, with Memorial Hermann paying $4 million upfront and subsequent payments over three years. Below is a detailed analysis and approach planned by the project management team: **Project Financial Overview:** - **Initial Payments:** - $4 million upfront from Memorial Hermann. - $3 million for the first year. - $1.5 million for the second year. - $7.5 million for the third year. - **Investment and Running Costs:** - Loan from Bank of America Merrill Lynch for $2 million, invested at the project's start. - Medtronic will spend: - $3.5 million in Year 1. - $10 million in Year 2. - $1.5 million in Year 3. - $4 million in Year 4. - $3 million in Year 5. - **Delivery and Final Payments:** - Medical devices delivered in Year 4. - Memorial Hermann pays $4.25 million at the end of Year 4 and $4.5 million at the end of Year 5. **Project Evaluation Process:** 1. **Generate Cash Flow Estimates:** - Create a table outlining cash flow estimates for the project. 2. **Create a Cash Flow Diagram:** - Visual representation of cash inflows and outflows over the project’s duration. 3. **Evaluate Rates of Return:** - Determine potential rates of return the project is likely to achieve. 4. **Rate of Return Calculation:** - Use Microsoft Excel to obtain present worth plotted against various rate of return values (0% to 100%, with increments of 5%). 5. **Calculate Internal Rate of Return (IRR):** - Find the IRR for zero net present worth using Excel. 6. **Decision-Making Criteria:** - Medtronic management has set a Minimum Attractive Rate of Return (MARR) of 15% for projects. - Evaluate project feasibility against a reinvestment rate of 14% and a loan cost of 7%. **Management Implications:** - The project’s outcome is crucial for decisions on staffing and operation of plants. Management
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