1. What are the NPV, IRR, MIRR, and payback of the proposed ambulatory surgery center? Do the

measures indicate acceptance or rejection of the proposed ambulatory surgery center?

2. Inflation is one of the most difficult factors to deal with in project analysis.

a. Complete the inflation impact table shown in Exhibit 20.2.

b. What management information is provided by the inflation impact table?

3. One board member wants to make sure that a complete risk analysis, including sensitivity and scenario

analyses, is performed before the proposal is sent to the board.

a. Perform a sensitivity analysis.

b. What management information is provided by the sensitivity analysis?

4. a. Perform a scenario analysis.

b. What management information is provided by the scenario analysis?

c. Why is the expected NPV obtained in the scenario analysis different from the base case NPV?

5. A board member is interested in the utilization breakeven of the Center.

a. What are the breakeven values of the three input variables that are highly uncertain?

b. What management information is provided by the breakeven analysis?

6. To help with the risk-incorporation phase of the analysis, Jules consulted with Mark Hauser, the

hospital?s CFO, about both the risk inherent in the hospital's average project and how the hospital

typically adjusts for risk.

a. What is the project's differential risk-adjusted NPV?

b. Assess the corporate risk of the project. (No calculations are required. Think about correlation of the

surgery center and hospital cash flows.)

7. Jules Bergman is aware that there are some qualitative factors that are relevant to the surgery center

decision.

a. What qualitative factors might support project acceptance?

b. What qualitative factors might preclude project acceptance?

c. Can you think of any costs that might be associated with the project that have not been included in

the analysis?

d. Are there any potential benefits that have not been included?

e. What additional data would you seek from other hospital staff members to conduct a more thorough

analysis?

8. Considering all points, would you build the ambulatory surgery center?

9. In your opinion, what are three key learning points from this case?

CORAL BAY HOSPITAL Additional Information for questions. QUESTION 2 (inflation impact table) The What-If Analysis in Excel can be used to produce a table that shows the impact of inflation on the project's NPV. Here are the steps: In cell H21, enter \"=F21\" In cells I21 to O21, enter 0%, 1%, 2%, 3%, 4%, 5%, and 6%, respectively In cells H22 to H28, enter 0%, 1%, 2%, 3%, 4%, 5%, and 6%, respectively Highlight cells H21 to O28 Click on What-If Analysis and then Data Table Row Input Cell: D31 Column Input Cell: D32 Click OK The table should be populated. QUESTION 5 (breakeven values of three input variables) The What-If Analysis can be used to calculate the utilization breakeven volume of the Center. Here are the steps to find the breakeven number of procedures per day: From any cell, click on What-If Analysis and then Goal Seek Set Cell: F21 To value: 0 By changing cell D25 Click OK The value in cell D25 will change to 18.18, which is the breakeven number of procedures per day. This is verified by the new zero value in cell F21, indicating an NPV of $0. Cases in Healthcare Finance, 5th Edition Copyright 2014 Health Administration Press CASE 20 QUESTIONS CORAL BAY HOSPITAL Traditional Project Analysis 1. What are the NPV, IRR, MIRR, and payback of the proposed ambulatory surgery center? Do the measures indicate acceptance or rejection of the proposed ambulatory surgery center? 2. Inflation is one of the most difficult factors to deal with in project analysis. a. Complete the inflation impact table shown in Exhibit 20.2. b. What management information is provided by the inflation impact table? 3. One board member wants to make sure that a complete risk analysis, including sensitivity and scenario analyses, is performed before the proposal is sent to the board. a. Perform a sensitivity analysis. b. What management information is provided by the sensitivity analysis? 4. a. Perform a scenario analysis. b. What management information is provided by the scenario analysis? c. Why is the expected NPV obtained in the scenario analysis different from the base case NPV? 5. A board member is interested in the utilization breakeven of the Center. a. What are the breakeven values of the three input variables that are highly uncertain? b. What management information is provided by the breakeven analysis? 6. To help with the risk-incorporation phase of the analysis, Jules consulted with Mark Hauser, the hospital's CFO, about both the risk inherent in the hospital's average project and how the hospital typically adjusts for risk. a. What is the project's differential risk-adjusted NPV? b. Assess the corporate risk of the project. (No calculations are required. Think about correlation of the surgery center and hospital cash flows.) 7. Jules Bergman is aware that there are some qualitative factors that are relevant to the surgery center decision. a. What qualitative factors might support project acceptance? b. What qualitative factors might preclude project acceptance? c. Can you think of any costs that might be associated with the project that have not been included in the analysis? d. Are there any potential benefits that have not been included? e. What additional data would you seek from other hospital staff members to conduct a more thorough analysis? 8. Considering all points, would you build the ambulatory surgery center? 9. In your opinion, what are three key learning points from this case? 12/6/2013 \fCASE 20 11/1/2015 Student Version Copyright 2014 Health Administration Press CORAL BAY HOSPITAL Traditional Project Analysis This case illustrates a complete capital budgeting analysis, including cash flow analysis and profitability measures. Note the model extends to Column I. The model consists of a complete base case analysisno changes need to be made to the existing MODEL-GENERATED DATA section. However, all values in the student version INPUT DATA section have been replaced with zeros. Thus, students must determine the appropriate input values and enter them into the model. These cells are colored red. When this is done, any error cells will be corrected and the base case solution will appear. Note that the student version does not contain any risk analyses, so students will have to create their own if required by the case. Furthermore, students must create their own graphics (charts) as needed to present their results. INPUT DATA: KEY OUTPUT: Land initial cost Land opportunity cost (and salvage value) Building/equipment cost Build/equipment salvage value Procedures per day Average net patient revenue per procedure Labor costs Utilities costs Incremental overhead Supply cost ($/procedure) Inflation rate on net patient revenue Inflation rate on costs Tax rate Revenues lost from inpatient surgeries Reduction in inpatient surgery costs Cost of capital $0 $0 $0 $0 0 $0 $0 $0 $0 $0 0.0% 0.0% 0.0% $0 $0 0.0% NPV IRR MIRR Payback $0 Err:523 10.0% 999.0 MODEL-GENERATED DATA: Depreciation Schedule: Year 1 2 3 4 5 6 MACRS Factor 0.20 0.32 0.19 0.12 0.11 0.06 Deprec. Expense $0 0 0 0 0 0 End of Year Book value $0 0 0 0 0 0 Net Cash Flows: Land opportunity cost Building/equipment cost Net patient revenue (including inpatient loss) Less: Labor costs Cost savings on inpatients Utilities costs Supplies Incremental overhead Depreciation Income before taxes Taxes Project net income Plus: Depreciation Plus: Net land salvage value Plus: Net building/equipment salvage value Project Cash Flows 0 $0 0 1 2 3 4 5 $0 0 0 0 0 0 0 $0 0 $0 0 $0 0 0 0 0 0 0 $0 0 $0 0 $0 0 0 0 0 0 0 $0 0 $0 0 $0 0 0 0 0 0 0 $0 0 $0 0 $0 0 0 0 0 0 0 $0 0 $0 0 0 0 Net cash flow $0 $0 $0 $0 $0 $0 Cumulative net cash flow (For payback calculation) $0 $0 $0 $0 $0 $0 Profitability and Breakeven Measures: Net present value (NPV) Internal rate of return (IRR) Modified IRR (MIRR) $0 Err:523 10.0% Payback 999.0 END