After a detailed analysis of the operations of FFWCC, the committee used a cash estimation process to determine a 5-year projection (baseline projection) of a proposed restructuring of wound care operations. The projection involved an analysis of historical operations, but also included forward looking assumptions.   The baseline projection resulted in total patient service revenues of $4,672,000 for the 5-year period; total expenses of $4,286,000; and income of $386,000. The ROI for the projection period was 8%. The committee also considered an investment of $100,000 as identified by the management team of TPMH.   A further analysis was completed that identified an IRR of 50% on this investment. The NPV of cash flows related to income was $274,000 and $174,000 (after considering the initial investment required to attain restricted operations).

The committee also determined through sensitivity analysis that patient service revenues, and to some extent cost inflation, were critical assumptions that would have an impact on the credibility of the baseline projection.

As the management team of TPMH was indicating they intended to allocate resources toward the restructuring of FFWCC operations, the committee decided to further assess the baseline projection with two scenarios. Scenario #1 would test patient service volume and provider mix assumptions. Scenario #2 would test cost inflation assumptions. The likelihood of actual operations meeting the baseline projection was 70%; scenario #1 20%; and scenario #2 10%. In addition, the committee determined that a total investment of $200,000 would be required to expand the capacity of the center to accommodate the increased patient volumes under scenario #2. An investment of $100,000 would be necessary for scenario #2. A recap of the risk analysis results are reflected below:

                                                Baseline                        Scenario #1                   Scenario #2      

Investment                               $100,000                      $200,000                      $100,000         

NPV of Operations                    $274,000                      $416,000                      $(162,000)

NPV with Investment                $174,000                      $216,000                      $(262,000)

IRR                                           50%                              43%                              n/a

An analysis of likely outcomes is as follows:

Likelihood/Probability               70%                  20%                  10%      Total/Expected

Likely IRR                                  35%                  9%                  0%                  43%

Likely NPV of Operations           $191,000      $83,000            $(16,000)          $258,433

Likely NPV with Investment       $121,000      $43,000             $(26,000)          $138,000

1. Identify 3 factors that come into play in the risk analysis that differ from income or loss and ROI in the baseline projection?
2. Compare Total/Expected outcomes to the baseline projection and comment on your analysis?
3. When the committee takes a final vote on a recommendation to TPMH would you support the baseline projection?
4. Do you feel stand alone risk was addressed?