Holiday Hospital has seen a competitor, Grinch General, rapidly grow services in the area. In order to expand services to stay competitive, leadership is considering building a new outpatient wing for expanded specialty services with a sizeable cash investment.

Expect revenue with $90,000$ visits

Payer $\%$ of Volume $($Payer Mix$)$ Net Revenue Per Visit $90,000$

Medicaid $35\%$ $ $130$ $ $4,095,000$

Medicare $25\%$ $ $200$ $ $4,500,000$

Commercial $20\%$ $ $250$ $ $4,500,000$

Managed Care $20\%$ $ $190$ $ $3,420,000$

Total $100\%$ $ $770$ $ $16,515,000$

$1.$ If the following is also true, in what year will the hospital break even on its investment, including discounting for future cash flow? Show all work.

Conditions:

$-$ Capital Costs: $$20,000,000$

$-$ Annual Visits Expected: $90,000$

$-$ Discount$/$Interest Value: $9\%$

$-$ Net Revenue per Visit: Calculate from Payer Mix Table

$-$ Variable Costs Per Visit: $$110$

$-$ Annual Fixed Costs: $$400,000$

Hint: You should prepare an NPV analysis and assume no inflation for revenue or costs. To know which year will break even, you should have the NPV of cash flow greater than or equal to the capital investment. The table below may help you frame your calculations $$ you may need to calculate more than $3$ years for your payoff.

P&L Category Year $1$ Year $2$ Year $3...$

Net Patient Services Revenue Net Revenue per Visit x Visits $=$ Year $1=$ Year $1$

Variable Costs Variable Cost per Visit x Visits $=$ Year $1=$ Year $1$

Fixed Costs Fixed Costs $=$ Year $1=$ Year $1$

Annual Profit $($Cash Flow$)$ Net Revenue Less Costs $=$ Year $1=$ Year $1$

Net Present Value Annual Profit

$(1$ Year Discount$)$ Annual Profit

$(2$ Year Discount$)$ Annual Profit

$(3$ Year Discount$)$

A$.$ Calculate the IRR $\%$ for the first $5$ years of your business plan. Based on the opportunity cost, is the investment good or bad? Would this change if the interest rate was $11\%$ instead of $9\%?$ Justify your answer.

B$.$ After thinking through expansion of outpatient services, you feel the model created in $(1)$ may not take into account all of the conditions that could impact cash flow. Provide an explanation of $2$ things the model does not consider and if the payoff would improve or get worse if those considerations were included.