The hospital’s tax rate is 40% and its corporate cost of capital is 10%.
a. Perform a sensitivity analysis to see how NPV is affected by changes in the number of procedures per day, average collection amounts and salvage value.
b. Conduct a scenario analysis. Suppose that the hospital’s staff concluded that the three most uncertain variables were number of procedures per day, average collection amount and the equipment’s salvage value. The following data was developed:
Scenario Probability # of procedures avg collection salvage value
Worst 0.25 10 $ 60 $100,000
Most likely 0.50 15 $ 80 $200,000
Best 0.25 10 $100 $300,000
c. Finally assume that California Health Center’s average project has a coefficient of variation of NPV in the range of 1.0 – 2.0. The hospital adjusts for risk by adding or subtracting 3 % points to its 10% corporate cost of capital. After adjusting for differential risk, is the project still profitable?
15.4 The managers of Medtronics are evaluating the following four projects for the coming budget period. The firm’s corporate cost of capital is 14%.
PROJECT COST IRR
A $15,000 17%
B $15,000 16%
C $12,000 15%
D $20,000 13%
a. What is the firm’s optimal capital budget?
b. Now suppose Medtronic’s managers want to consider differential risk in the capital budgeting process. Project a has average risk, B has below-average risk and C has an above average risk, and D has average risk. What is the firm’s optimal capital budget when differential risk is considered? (Hint: the firm’s managers lower the IRR of high-risk projects by 3% points and raise the IRR of low risk projects by the same amount).
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more