Read Case 20 (pages 127-132) from Gapenski’s Cases in Healthcare Finance – “Coral Bay Hospital.” SEE ATTACHMENT.
Create a presentation.
In your presentation, provide a response to the following questions from the case study:
- What are the NPV, IRR, MIRR, and payback of the proposed ambulatory surgery center? Do the measures indicate acceptance or rejection of the proposed ambulatory surgery center?
- One board member wants to make sure that a complete risk analysis, including sensitivity and scenario analyses, is performed before the proposal is sent to the board.
- Perform a sensitivity analysis.
- What management information is provided by the sensitivity analysis?
- Perform a scenario analysis.
- What management information is provided by the scenario analysis?
- Why is the expected NPV obtained in the scenario analysis different from the base case NPV?
- A board member is interested in the utilization breakeven of the Center.
- What are the breakeven values of the three input variables that are highly uncertain?
- What management information is provided by the breakeven analysis?
Expert Solution Preview
In this presentation, we will analyze Case 20 from Gapenski’s Cases in Healthcare Finance – “Coral Bay Hospital.” The case study focuses on evaluating the financial feasibility of a proposed ambulatory surgery center. We will address several questions regarding the net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), payback period, sensitivity analysis, scenario analysis, and utilization breakeven of the center. Through these analyses, we will determine the viability of the proposed ambulatory surgery center and provide insights into its financial implications.
1. NPV, IRR, MIRR, and Payback Analysis:
To determine the acceptance or rejection of the proposed ambulatory surgery center, we need to evaluate the NPV, IRR, MIRR, and payback period.
The net present value (NPV) is calculated by discounting the cash inflows and outflows of the project to determine its profitability. The NPV represents the dollar value of the project’s profitability at a specified discount rate. If the NPV is positive, it indicates acceptance, whereas a negative NPV suggests rejection.
The internal rate of return (IRR) measures the project’s return rate, which should be compared to the required rate of return to determine project acceptance or rejection. If the IRR exceeds the required rate of return, the project is accepted.
The modified internal rate of return (MIRR) is a modification of the IRR that addresses the reinvestment rate assumption. It assumes that cash inflows are reinvested at a predefined rate rather than the IRR. Similar to the IRR, if the MIRR exceeds the required rate of return, the project is accepted.
The payback period represents the time required for the project’s cash inflows to recover the initial investment. If the payback period is within an acceptable range, the project is accepted.
2. Sensitivity Analysis:
To address the board member’s request for a risk analysis, we will perform a sensitivity analysis. This analysis assesses the impact of changes in input variables on the project’s financial measures.
The sensitivity analysis involves varying one input variable at a time while keeping other variables constant and observing the impact on the NPV, IRR, MIRR, and payback period. By analyzing how changes in key variables affect the project’s financial indicators, it provides insights into the project’s sensitivity to different risk factors.
The sensitivity analysis highlights the key variables that significantly influence the project’s profitability and risk. It helps management identify critical areas that require attention and potential adjustments to improve the project’s financial performance.
3. Scenario Analysis:
Additionally, we will conduct a scenario analysis to evaluate different scenarios’ impact on the project’s financial measures. This analysis involves determining best-case, worst-case, and most likely scenarios by varying multiple input variables simultaneously.
The scenario analysis provides a comprehensive understanding of how changes in key variables interact and impact the project’s NPV, IRR, MIRR, and payback period. It helps identify the potential range of outcomes and assesses the project’s robustness in different circumstances.
The expected NPV obtained from the scenario analysis may differ from the base case NPV due to variations in the assumed values of input variables. These variations reflect different market conditions, operational factors, and uncertainties associated with the project. Therefore, the expected NPV incorporates the probability-weighted average of the potential outcomes from different scenarios.
4. Utilization Breakeven Analysis:
To address the board member’s interest in the utilization breakeven of the center, we will perform a breakeven analysis. This analysis determines the level of utilization at which the project breaks even, i.e., when the revenue equals the cost.
The breakeven analysis focuses on the three input variables that are highly uncertain, such as patient volume, variable cost per case, and average net revenue per case. By identifying the breakeven values of these variables, we can estimate the minimum utilization level required for the project to cover its costs.
The breakeven analysis provides management with insights into the volume of patients, the unit cost, and the pricing strategy necessary to achieve profitability. It helps identify the critical threshold that the project should aim to exceed for financial success.
In conclusion, this presentation addressed various financial analyses related to the proposed ambulatory surgery center at Coral Bay Hospital. We evaluated the NPV, IRR, MIRR, and payback period to determine project acceptance or rejection. We performed sensitivity and scenario analyses to gauge the project’s sensitivity to key variables and assess its potential outcomes under different scenarios. Finally, we conducted a breakeven analysis to identify the utilization level required for the project to break even. These analyses provide crucial management information for decision-making regarding the viability of the ambulatory surgery center.