Question
Consider the project contained in Problem 7 in Chapter 11 (California Health Center) A. Perform a sensitivity analysis to see how NPV is affected by
Consider the project contained in Problem 7 in Chapter 11 (California Health Center)
A. Perform a sensitivity analysis to see how NPV is affected by changes in the number of procedures per day, average collection amount, and salvage value. Remember supplies vary with number of procedures.
B. Conduct a scenario analysis. Suppose that the hospital's staff concluded that the three most uncertain variables were number of procedures per day, average collection amount, and the equipment's salvage value. Furthermore, the following data were developed:
Scenario | Probability | # of Procedures | Avg. Collection | Equip. Salvage Value |
Worst | 0.25 | 10 | $60 | $100,000 |
Most Likely | 0.50 | 15 | $80 | $200,000 |
Best | 0.25 | 20 | $100 | $300,000 |
C. Finally, assume that California Health Center's average project has a coefficient of variation of NPV in the range of 1.0-2.0 (Hint: Coefficient of variation is defined as the standard deviation of NPV divided by the expected NPV). The hospital adjusts for risk by adding or substracting 3 percentage points to its 10 percent corporate cost of capital. After adjusting for differential risk, is the project still profitable?
D. What type of risk was measured and accounted for in Parts B and C? Should this be of concern to the hospital's managers.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started