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SOLVE IN EXCEL. You are now working in the Ministry of Health in a Developing Country. There are a few remote towns in this country
SOLVE IN EXCEL.
- You are now working in the Ministry of Health in a Developing Country. There are a few remote towns in this country where there is no modern medical clinic and some people rely on traditional medicine. You have been asked to plan and develop a clinic in one of these remote towns. In this country, the basic approach to such projects is for the government to build, own and operate (BOO) the project.
- Given the following parameters would it make sense for the government to open the clinic?
- The capital cost of the clinic, all paid in 2022 is $ 5 million. The project will last 15 years and there is to be no further investment. At the end of 15 years (2037) the residual value of the project is assumed to be the book value of the capital. The capital depreciates at 5% per annum.
- The government raises funds on global capital markets, and pays 8% interest.
- Government clinics charge a small fee for a visit, set at $ 10 per visit. This is not expected to change throughout the life of the project. This allows substantial consumer surplus to accrue from each visit, which is assumed to be $ 490 per visit.
- The number of visits to the clinic are expected to be 1000 in the first year (2023), and rising by 10% per year throughout the life of the project.
- There are three operational costs that start in the first year of operation (2023):
- Medical staff, which cost $100,000 in 2023, and this rises by 4% per annum,
- Medicines, which start at $10 per visit, but these costs escalate at 10% per annum,
- Maintenance, which is $5,000 per year in every year.
- What is the NPV of the project from the governments perspective, and for the economy as a whole? Should the government go ahead with this project?
- Given the following parameters would it make sense for the government to open the clinic?
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