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30 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 31 Total projected Visits 55000 55000 60500 63525 65431 67394 69415 71498 32 Average Revenue per visit 75.00 $ 75.00 $ 76.50 $ 78.03 $ 79.59 $ 83.57 $ 85.24 $ 86.95 83 Average Variable Cost per Visit 50.00 $ 50.00 $51.00 $52.02 $53.06 $54.12 $55.20 $56.31 34 Total Fixed Costs 500,000.00 $ 500,000.00 $ 505,000.00 $ 510,050.00 $ 515,150.50 $ 520,302.01 $525,505.03 $530,760.08 35 Purchase Price for Equipment $ 4,500,000.00 36 Monthly Rental Cost to Occupy the New Site to 5,000.00 $ 60,000.00 $ 61,500.00 $ 63,037.50 $ 64,613.44 $ 66,228.77 $ 67,884.49 $ 69,581.61 37 Salvage Values of the Equipment is due end of Ye 7 $ 750,000.00 38 Corporate Tax Rate 40% 39 Cost of Capital 8% 40 41 Other Assumptions 42 1) Projected Visits are Expected to increase by 10% in Year 2, 5% in Year 3 and 3% each Year thereafter 43 2) Negotiation with payers indicate that revenue rate (ie payment per visits) will increase by 2% each year and 5% in year 5 then 2 % per year thereafter 44 3) Variable Costs are expected to rise at a rate of 2% per year 15 4) Fixed Costs are expected to rise at a rate of 1% per year 46 6) Rent rates will be increased by 2.5% at the end of each year 47 6) The equipment will depreciate based on the straight-line method of depreciation, a 7-year estimated life and the equipment will be sold at salvage value at the end of year 7 18 7) Tax rate will remain constant for the entire 7-year Period and do not assume any tax loss carryforward 49A B D E F G H K M N O P Q Northeast Hospital is analyzing a potential project for a new outpatient center Let's go another step deeper....Starting with the solution file Most Likely Case Tab from Week 5 Excel Assignment and using the starting values for each variable in the Most Likely Case.... Revise your Sensitivity Analysis to determine your Most Sensitive Variable of the Three listed below. Hint: if you keep all else constant and only adjust one level of one variable at a time, you can plot your NPV values into the following table and the graph will automatically fill in for you: Fill in your new inputs in blue cells in table and look at line C71 for your resulting NPV at each sensitivity level using the range of variations lists on line 26 Questions: 1) What is your most Sensitive Variable, and how can you tell this? 1.2 Chart Title Dependant Variable 1 Resulting NPV Values of Sensitivity 2) What is your least Sensitive Variable, and how can you tell this? Number of Avg Revenue Equipment 08 Procedures per Procedure Salvage Value 0.6 12 -30% (918,937) (40,829,286) 659,436 13 -20% (371,364) 2,484,930 680,884 0.4 3) From the solution file from Week 5 and using the final 14 10% 176,209 880,574) 702,333 NPV values for the Best Case, Worst Case and Most Likely 15 NPV of Most Likely 0% $ 723,782.02 $ 723,782.02 $ 723,782.02 0.2 Case, Create a Scenario Anaysis of Expected NPV 16 10% 1,271,355 2,328,138 745,231 Variance, Standard Deviation and Covariation Coefficient 17 20% 1,818,928 3,932,494 7,666,680 0 for this Project. Assume Best Case has a 20% probability, 18 30% 2,366,501 5,536,850 788,128 Most Likely Case a 60% Probabilty and Worst Case a 19 20% probability. Be sure to show your work in new worksheet 20 Note: This table will need to be manually populated with your NPV from cell C71 by creating the appropriate excel table and calculations. each time you change one of the variables highlighted in blue for the ranges noted 22 ot -30% to +30% 4) Assuming average risk is a CV of 1.5 do we need to adjust 23 our cost of capital for this project? If so, do we adjust it up 24 or down? Be sure to Expalin your answer on your scenario analysis tab 25 Most Likely 26 Total Visits 55000 Range of Variation -30%, -20%, -10%, +10%, +20%, 30% 5) What management actions can you take to mitigate the volatility Revenue per Visit 75.00 Range of Variation -30%, -20%, -10%, +10%, +20%, 30% of your most sensitive variable, your least sensitive variable and the 28 Salvage Value $ 750,000.00 Range of Variation -30%, -20%, -10%, +10%, +20%, 30% remaining variable. Answer this question on Scenario tab 29 Most Likely Case 30 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 749 50 51 Derived Cash Flow 52 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 53 Purchase Equipment $ (4,500,000.00) 54 Revenues $ 4,125,000.00 $ 4,628,250.00 $ 4,956,855.75 $5,207,672.65 $ 5,632,097.97 $ 5,917,082.13 $ 6,216,486.49 55 56 Variable Unit Costs $ 2,750,000.00 $ 3,085,500.00 $ 3,304,570.50 $ 3,471,781.77 $ 3,647,453.92 $ 3,832,015.09 $ 4,025,915.06 57 Fixed Costs $ 500,000.00 $ 505,000.00 $ 510,050.00 $ 515,150.50 520,302.01 $ 525,505.03 $ 530,760.08 58 Rental Costs S 60,000.00 $ 61,500.00 63,037.50 $ 64,613.44 $ 66,228.77 $ 67,884.49 S 69,581.61 59 Depreciation $ 535,714.29 $ 535,714.29 $ 535,714.29 $ 535,714.29 535,714.29 $ 535,714.29 535,714.29 60 Total Expenses $ 3,845,714.29 $ 4,187,714.29 $ 4,413,372.29 $ 4,587,259.99 $ 4,769,698.99 $ 4,961,118.90 $ 5,161,971.03 61 62 Income Before Taxes $ 279,285.71 $ 440,535.71 $ 543,483.46 $ 620,412.66 $ 862,398.98 $ 955,963.23 $ 1,054,515.46 $ 111,714.29 $ 176,214.29 $ 217,393.39 $ 248,165.06 $ 344,959.59 $ 382,385.29 $ 421,806.18 63 Taxes 64 Profit (Loss) After tax $ 167,571.43 $ 264,321.43 326,090.08 $ 372,247.60 S 517,439.39 $ 573,577.94 $ 632,709.27 65 66 Cash flow Add-back Depreciation $ 703,285.71 $ 800,035.71 $ 861,804.36 $ 907,961.88 $ 1,053,153.68 $ 1,109,292.22 $ 1,168,423.56 67 Cash flow Salvage Value $ 750,000.00 68 Total Cashflow per Year $ (4,500,000.00) $ 703,285.71 $ 800,035.71 $ 861,804.36 $ 907,961.88 $ 1,053,153.68 $ 1,109,292.22 $ 1,918,423.56 69 Cummulative Cashflow $(4,500,000.00) $ 3,796,714.29 $ 299,678.57 $ 2,134,874.21 $ 2,134,874.21 $ 935,533.58 $ 2,044,825.80 $ 3,213,249.36 70 71 Net Present Value $723,782.01 72 IRR 11.90% 73 MIRR 10.33% 74 Payback Period 2.0 75 76 77 78 79