1 9/1/2014 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 12 Project Risk Analysis Mini-Case Shrieves Hospital Ltd. is considering adding a new line to its diagnostic product mix, and the capital 8 budgeting analysis is being conducted by Sidney Johnson, a recently graduated MHA. A new bone density 9 scanner would be set up in unused space in Shrieves's main clinic. The machinery's invoice price would be 10 approximately $200,000; another $10,000 in shipping charges would be required; and it would cost an 11 additional S30,000 to install the equipment. The machinery has an economic life of four years, and Shrieves 12 has obtained a special tax ruling which places the equipment in the MACRS three-year class.The machiner 13 is expected to have a salvage value of S25,000 after four years of use. The new line would generate 14 incremental sales of 1,250 scans per year for four years at a incremental cost of $100 per scan in the 15 first year, excluding depreciation. Each scan would generate revenue of $200 in the first year. The price 16 and cost of each scan are expected to increase by 3 percent per year due to inflation. Further, to handle 17 the new line, the hospital's net operating working capital would have to increase by an amount equal to 1 18 percent of sales revenues*. The hospital's tax rate is 40 percent, and its corporate cost of capital is 10 19 percent 20 21 a. Perform a sensitivity analysis on the corporate cost of capital, number of scans, and salvage value Assume that each of these variables can vary from its base case by plus and minus 15 and 30 percent 22 23 Include a sensitivity diagram 24 b. Perform a scenario analysis using the worst-, most likely, and best-case probabilities in the table below: umber of Price 26 Scenario Probability scans 27 per scan 1.600 S240 Best Most likel 1.250 S200 29 50 900 S160 30 Worst 31 32 c. Assume that Shrieves's average project has a coefficient of variation of NPV in the range of 0.4 33 The hospital typically adds or subtracts 3 percentage points to its corporate cost of capital to adjust for 34 risk. Should the new line be accepted