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? Resulting NPV Values of Sensitivity Number of Procedures NPV of Most Likely -30% -20% -10% 0% $ 10% 20% 30% Avg Revenue per Procedure 723,782.02 $ 723,782.02 $ 2) What is your least Sensitive Variable, and how can you tell this? Equipment Salvage Value 723,782.02 Note: This table will need to be manually populated with your NPV from cell C71 each time you change one of the variables highlighted in blue for the ranges noted ot -30% to +30% Total Visits Revenue per Visit Salvage Value Total projected Visits Average Revenue per visit Average Variable Cost per Visit Total Fixed Costs Purchase Price for Equipment Monthly Rental Cost to Occupy the New Site Salvage Values of the Equipment is due end of Year Corporate Tax Rate Cost of Capital Chart Title 4) Assuming average risk is a CV of 1.5 do we need to adjust our cost of capital for this project? If so, do we adjust it up or down? Be sure to Expalin your answer on your scenario analysis tab Most Likely 55000 Range of Variation -30%, -20%, -10%, +10%, +20%, 30% $ 75.00 Range of Variation -30%, -20%, -10%, +10%, +20%, 30% $ 750,000.00 Range of Variation -30%, -20%, -10%, +10%, +20%, 30% Most Likely Case 5) What management actions can you take to mitigate the volatility of your most sensitive variable, your least sensitive variable and the remaining variable. Ansswer this question on Scenario tab Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 55000 55000 60500 63525 65431 67394 69415 71498 $ 75.00 $ 75.00 $ 76.50 $ 78.03 $ 79.59 $ 83.57 $ 85.24 $ 86.95 $ 50.00 $ 50.00 $51.00 $52.02 $53.06 $54.12 $55.20 $56.31 $ 500,000.00 $ 500,000.00 $ 505,000.00 $ 510,050.00 $ 515,150.50 $ 520,302.01 $ 525,505.03 $ 530,760.08 $ 4,500,000.00 $ 5,000.00 $ 60,000.00 $ 61,500.00 $ 63,037.50 $ 64,613.44 $ 66,228.77 $ 67,884.49 $ 69,581.61 $ 750,000.00 40% 8% 7 Other Assumptions 1) Projected Visits are Expected to increase by 10% in Year 2, 5% in Year 3 and 3% each Year thereafter 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 3) Variable Costs are expected to rise at a rate of 2% per year 4) Fixed Costs are expected to rise at a rate of 1% per year 6) Rent rates will be increased by 2.5% at the end of each year 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 7) Tax rate will remain constant for the entire 7-year Period and do not assume any tax loss carryforward Purchase Equipment Revenues Derived Cash Flow Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 $ (4,500,000.00) $ 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 Variable Unit Costs Fixed Costs Rental Costs Depreciation Total Expenses $ 2,750,000.00 $ 3,085,500.00 $ 500,000.00 $ 505,000.00 $ 60,000.00 $ 61,500.00 $ 535,714.29 $ 535,714.29 $ 3,845,714.29 $ 4,187,714.29 Income Before Taxes Taxes Profit (Loss) After tax $ $ $ 279,285.71 $ 111,714.29 $ 167,571.43 $ 440,535.71 $ 176,214.29 $ 264,321.43 $ 543,483.46 $ 217,393.39 $ 326,090.08 $ 620,412.66 $ 248,165.06 $ 372,247.60 $ $ 703,285.71 $ 800,035.71 $ 861,804.36 $ 907,961.88 $ Cash flow Add-back Depreciation Cash flow Salvage Value Total Cashflow per Year Cummulative Cashflow Net Present Value IRR MIRR Payback Period $ 3,304,570.50 $ 3,471,781.77 $ 510,050.00 $ 515,150.50 $ 63,037.50 $ 64,613.44 $ 535,714.29 $ 535,714.29 $ 4,413,372.29 $ 4,587,259.99 $ $ $ $ $ $ (4,500,000.00) $ 703,285.71 $ 800,035.71 $ 861,804.36 $ 907,961.88 $ $ (4,500,000.00) $ (3,796,714.29) $ (2,996,678.57) $ (2,134,874.21) $ (1,226,912.33) $ $723,782.02 11.90% 10.33% 5.2 3) From the solution file from Week 5 and using the final NPV values for the Best Case, Worst Case and Most Likely Case, Create a Scenario Anaysis of Expected NPV, Variance, Standard Deviation and Covariation Coefficient for this Project. Assume Best Case has a 20% probability, Most Likely Case a 60% Probabilty and Worst Case a 20% probability. Be sure to show your work in new worksheet by creating the appropriate excel table and calculations. 3,647,453.92 520,302.01 66,228.77 535,714.29 4,769,698.99 $ 3,832,015.09 $ 4,025,915.06 $ 525,505.03 $ 530,760.08 $ 67,884.49 $ 69,581.61 $ 535,714.29 $ 535,714.29 $ 4,961,118.90 $ 5,161,971.02 862,398.98 $ 344,959.59 $ 517,439.39 $ 955,963.23 $ 1,054,515.46 382,385.29 $ 421,806.18 573,577.94 $ 632,709.28 1,053,153.68 $ 1,109,292.23 $ 1,168,423.56 $ 750,000.00 1,053,153.68 $ 1,109,292.23 $ 1,918,423.56 (173,758.65) $ 935,533.58 $ 2,103,957.14