Background:

Coral Bay Hospital is a 250 investor-owned hospital located in Florida. The hospital was founded by a physician, Rob Winslow in 1946. The Florida Keys has experienced a population explosion, which fostered for the high economic growth and need for more healthcare services. The hospitals management is currently evaluating a proposed ambulatory (outpatient) surgery center. The outpatient surgery market has experienced significant growth since the first center opened in 1970. By 1990, about 2.5 million procedures were being performed at stand-alone outpatient centers, but by 2009 the number had grown to more than 20 million. The growth was fueled by three factors that include rapid advancements in technology, Medicare aggressiveness in approving new minimally invasive techniques, and patients preference for outpatient services because they are more convenient and less costly. Rapid growth within this outpatient services has triggered the increase in the number of facilities nationwide. There are surprisingly no outpatient facilities that exist in Coral Bays immediate service area. This is what lead the organization to propose the implementation of an Ambulatory Surgery Center (Gapenski, Louis C, 2013, pg 146).

Coral Bay Hospital would be wise to evaluate an ambulatory outpatient surgical center today. Already, a group of local surgeons are rumored to be exploring the feasibility of a physician-owned facility. Interest in being the first outpatient surgery center, and possibly dominating the local market, is high due to a consistent annual growth of 10 percent in outpatient surgeries. Meanwhile, inpatient surgeries, what Coral Bay Hospital currently offers, is predicted to remain flat.

Coral Bay Hospital has a big advantage in opening the first outpatient surgical center, they own a large enough parcel of land next to the hospital that is described as perfect for a new outpatient surgical center. The problems, analysis, and conclusion for this project will be discussed and analyzed below.

Problem:

When the project (Ambulatory Surgery Center) was mentioned briefly at the meeting of the hospital's board of directors, several questions were raised. One board member wanted to make sure that a complete risk analysis, including sensitivity and scenario analyses, is performed before the proposal is presented to the board. Another board member countered that she thought the hospital was putting too much faith in the numbers and how they should start worrying more about how projects fit into their strategic vision and how they affect the services that they currently offer. Another concern was over the impact that the ambulatory surgery center will have on the current volume of inpatient surgeries (Gapenski, Louis C, 2010). There is much uncertainty in the number of procedures per day, average revenue per procedure, and build/equipment salvage value. There will be a completion of a project analysis and recommendations based on the findings. To determine if Coral Bay should accept the proposed ambulatory surgery center project, there will be use of a Traditional Capital Budgeting Analysis, Cash Flow Estimation, Risk Assessment, and Risk Incorporation Analysis.

The Traditional capital Budgeting Analysis will be used to analyze the projects cash inflows and outflows to determine whether the expected return meets the target that Coral Bay has determined. The Statement of Cash Flows joins the income statement and the balance sheet and there is then the creation of an income statement-like report that focuses on cash flows. The Statement of Cash Flows are intended to answer the following questions: Where did the business get its cash? What did it do with the cash that it got? and How did its cash position change? The Cash Flow Estimation will be used to define the economic sustainability of long-term investments of the facility. The cash flows will be estimated using discounted and non-discounted methods of cash flow. Financial Risk is produced whenever there is some chance of earning a return on an investment that is less than the amount expected. The Risk Assessment will be used to identify threats and risk factors that may have the potential to cause detriment to the business. The Risk Incorporation Analysis will be carried out to identify possible threats that the business faces. This will help to ascertain potential problems that could destabilize key business projects.

The results that come from these analyses will then be used to make recommendations and implementations for Coral Bay on the proposed ambulatory care facility. The goal of the analysis is to provide Coral Bay with different measures of the analysis. From the results, they will be able to identify the best and worst case scenarios to determine if they will be able to bear the costs of the project. It will also provide them with insight to determine if the project is worthy and profitable.

Data
Land Initial Cost	$150,000
Land Opportunity Costs	$200,000
Building/Equipment	$10,000,000
Building/Equipment Salvage Value	$5,000,000
Procedures per Day	20
Average Net Revenue	$1,000
Labor Costs	$918,000
Utilities Costs	$50,000
Incremental Overhead	$36,000
Supply cost	$200
Inflation Rate on Revenue	3.0%
Inflation Rate on Costs	3.0%
Tax Rate	40%
Revenues Lost from Inpatient Surgeries	$1,000,000
Reduction in Inpatient Surgery Costs	$500,000
Cost of Capital	10%
Number of Days	250

Total Revenue= 20 procedures per day x $1,000 (Average Net Revenue) = 20,000

20,000 x 250 (Number of Days Hospital will be open) = 5,000,000

Revenues Lost from Inpatient Surgeries (1,000,000)

5,000,000 - 1,000,000 = 4,000,000 Revenue annually

Depreciation Schedule:

10,000,000 = (Building/Equipment Costs)

Year	MACRS factor	Depreciation Expense	Book Value (End of Year)
1	.20	$2,000,000	$8,000,000
2	.32	$3,200,000	$4,800,000
3	.19	$1,900,000	$2,900,000
4	.2	$1,200,000	$1,700,000
5	.11	$1,100,000	$600,000
6	0.06	$600,000	0

Cash Flow Estimation:

Supplies = $200 (for medical supplies) x 20 procedures per day= $4,000

$4,000 x 250 (days of operation) = $1,000,000

Net Cash Flows
	0	1	2	3	4	5
Land Opportunity Costs	($200,000)
Building/Equipment Cost	($10,000,000)
Net Revenues		$4,000,000	$4,120,000	$4,243,600	$4,370,908	$4,502,035
Less: Labor Costs		$918,000	$945,540	$973,906	$1,003,123	$1,033,217
Cost savings on inpatients		($500,000)	($515,000)	($530,450)	($546,364)	($562,754)
Utilities Costs		$50,000	$51,500	$53,045	$54,636	$56,275
Supplies		$1,000,000	$1,030,000	$1,060,900	$1,092,727	$1,125,509
Incremental Overhead		$36,000	$37,080	$38,192.4	$39,338.17	$40,518.31
Depreciation (MACRS) five year class		$2,000,000	$3,200,000	$1,900,000	$1,200,000	$1,100,000
Income before Taxes		$496,000	($629,120)	$748,006	$1,527,447	$1,709,270
Taxes		$198,400	($251,648)	$299,203	$610,979	$683,708
Project net income		$297,600	($377,472)	$448,804	$916,468	$1,025,562
Plus: Depreciation		$2,000,000	$3,200,000	$1,900,000	$1,200,000	$1,100,000
Plus: Net land salvage value						$180,000
Plus: Net building/equipment Salvage Value						$3,240,000
Net Cash Flow	($10,200,000)	$2,297,600	$2,822,528	$2,348,804	$2,116,468	$5,545,562
Cumulative Net Cash Flow	($10,200,000)	($7,902,400)	($5,079,872)	($2,731,068)	($614,600)	$4,930,962
Profitability and Break Even Measures
Net Present Value (NPV)		$875,020
Internal Rate of Return (IRR)		12.9%
Payback		4.1 years
MIRR		11.8%

MIRR=

The Net Present Value ($875,020) is greater than 0 and the Internal Rate of Return (12.9%) and Modified Internal Rate of Return (11.8%) is greater than the Cost of Capital (10%), therefore Coral Bay Hospital should accept the proposed ambulatory surgery center project.

Risk Assessment:

Number of	Avg Revenue	Bldg/Equip
Procedures	per Procedure	Salvage Value
-30%	(2,006,852)	(2,727,320)	$316,191
-20%	(1,046,228)	(1,526,540)	502,467
-10%	(85,604)	(325,760)	688,744
0%	875,020	875,020	875,020
10%	1,835,644	2,075,800	1,061,296
20%	2,796,268	3,276,580	1,247,573
30%	3,756,892	4,477,360	1,433,849

Scenario	Probability of Outcome	Number of Procedures	Average revenue per procedure	Salvage Value	NPV
Worst case	25.00%	10	$800	$4,000,000	$4,401,146
Most likely case	50.00%	20	$1,000	$5,000,000	$583,347
Best case	25.00%	25	$1,200	$6,000,000	$5,320,866
Expected Value		20		$5,000,000	$583,347
Standard Deviation					$3,437,805

Coral Bay Hospital's recommendation: STATE and SUPPORT your RECOMMENDATION(s) for solving the Major Problem(s) you identified. Apply the background you developed in your ANALYSIS to justify your recommendation. DO NOT assume your recommendation(s) will be accepted without having to defend it. Consider COUNTERARGUMENTS and be prepared to deal in the written analysis.