Case 7.1: Nor Key concept: Parsima 7.1: North Bend Hospitale sept: Parsimonious forecasting of free cash flows orth Bend Hospital (NBH) is a profitable, rapidly growing hospital syste the Pacific Northwest. Part of its growth strategi Tart of its growth strategy is to purchase physician prac- tices and integrate them into the NBH sve em into the NBH system while retaining the physicians as employees. ciates (RRMA) RRMA reported fisca margin of $500 ating assets totaled CFO has entered into purchase discussions with Rogue River Medical na (RRMA), a physician practice employing 15 physicians with various specialties. A reported fiscal year 2015 revenues of $4,000,000, with a net operating profit f $500,000. Its December 31, 2015, financial statements revealed that net oper ssets totaled $600,000 and debt totaled $400,000. CFO of NBH estimates that RRMA revenue will grow at a rate of 10 perc er for the next three years and then slow to a long-term growth rate of 3 percent. thinks that physician compensation agreements will maintain a stable net operating margin and that the current margin will be able to be maintained indefinitely. ating assets are expected to grow at 5 percen LLO grow at 5 percent per year for three years and then slow to 2 percent indefinitely. The NBH current historical cost of capital is 10 percent, but the CFO has been 12 percent hurdle rate for capital investments. RRMA has suggested that it would accept a purchase offer of $4 million. RRMA is willing to take a $500,000 initial payment, with the balance paid at the rate of $500,000 per year (payment includes implicit interest at 5 percent) until the purchase price is paid. He thinks that profit margin and that using a 12 percent hurdle ILIUUIL JPN Assignment and Questions 1. Forecast the free cash flows for Rogue River Medical Associates. 2. Are these cash flows sufficient to make the payments on the purchase price 3. What should the CFO do