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Finance Week 3 and 4 Assignment hCMBA Cohen

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Question;Week 3 Assignment Case UVa Health System: The Long-Term Acute Care Hospital Project Wk 3 is the first of two consecutive weeks on CAPITAL BUDGETING. You will learn the three steps in capital budgeting: 1 Identify relevant incremental cash flows 2 Calculate cost of capital (k-wacc) to use as the discount rate 3 Calculate the metrics of capital budgeting: Net Present Value, Profitability Index, Internal Rate of Return, and Payback Period. Then, you will apply the metrics and information in the case study to make a recommendation whether to accept or reject the LTAC project. The essence of the capital budgeting process is to make sure, BEFORE an investment is made, that its prospective rate of return is high enough to justify the investment. Reading Cohen Finance Workbook chapter 4 is a review of Time Value of Money, which you covered in a previous course. Review it as necessary, but defer the review until you look at the TVM applications in chapter 5 beginning on p 79. You need to know TVM to understand the capital budgeting metrics of NPV, PI, and IRR. Make sure you have that context in mind before reviewing the TVM chapter 4 (only if you need to). Give the Uva Health Care System: The Long-Term Acute Care Hospital Project Case a quick read to understand what is going on - about calculating k-wacc and the decision metrics for the project, to give it either a green light or a red light. Wk 3 gives you practice on the basics. You won't have a full understanding of what the LTAC Project case is about at the end of Wk3. In Wk4, you will return to the case, analyze the project, and make a recommendation. Look at the Wk 3 assignment questions in the Q1, Q2, Q3 tabs. Read Cohen Finance Workbook chapter 5 selectively. Focus on: See the FLOW DIAGRAM in GREEN depicting the CAPITAL BUDGETING template. See the IS/BS Model in GREEN depicting the connection between PPE (BS) and operating expense (IS). Read pps 61-65 as a general introduction to capital budgeting. Read pps 70-76 on weighted average cost of capital to answer Q1. Read bottom p 67 to 69 on Net Working Capital to answer Q2. Read pps 79-85 on NPV, PI, IRR, PP to answer Q3. Questions See tabs for Q1, Q2, Q3 THESE QUESTIONS MUST BE ANSWERED USING EXCEL. MAKING CALCULATIONS OUTSIDE THE SPREADSHEET AND ENTERING THE RESULTS IS NOT USING EXCEL. YOU MUST USE EXCEL FORMULAS FOR MAKING CALCULATIONS!______________________________________________________________________________________Week 4 Assignment UNIVERSITY OF VIRGINIA MEDICAL CENTER Long Term Acute Care Hospital Free Cash Flow Projections Revenue and Cost Assumptions Results-No NWC Recovery Results-NWC Recovery Number of Beds 50 NPV $5,687 NPV $10,425 (000 ommited) Year 1 Utilization 26% IRR 17.6% IRR 21.2% Year 2 Utilization 60% Annual Increase in Utilization 4% Operating Expense (% of Revenue) 7.0% K-wacc 10% Year 1 2 3 4 5 6 7 8 9 10 VOLUME Patient Day Capacity 18,250 18,250 18,250 18,250 18,250 18,250 18,250 18,250 18,250 18,250 Utilization 26% 60% 62% 65% 67% 70% 73% 76% 79% 82%Patient Days Used 4,745 10,950 11,388 11,844 12,317 12,810 13,322 13,855 14,409 14,986 Average Patient Census per Day 13 30 31 32 34 35 36 38 39 41 Average Length of Stay 30 27 27 27 27 27 27 27 27 27 Number of Patients per Year 158 406 422 439 456 474 493 513 534 555 Full-Time Employees/Census 4.8 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 Full-Time Employees 62 105 109 114 118 123 128 133 138 144 INSURANCE PAYER Patient Mix Medicare 36% 57 146 152 158 164 171 178 185 192 200 Medicaid 29% 46 118 122 127 132 138 143 149 155 161 Commercial Payers 24% 38 97 101 105 109 114 118 123 128 133 Other 9% 14 37 38 39 41 43 44 46 48 50 Indigent 2% 3 8 8 9 9 9 10 10 11 11 158 406 422 439 456 474 493 513 534 555 Billing Annual Incr Medicare?bill per patient $27,795 0.0% 1,583 4,058 4,220 4,389 4,565 4,747 4,937 5,135 5,340 5,554 Medicaid?bill per patient $35,000 1.3% 1,605 4,170 4,337 4,510 4,691 4,878 5,073 5,276 5,487 5,707 Commercial Payers?bill per day $2,800 5.0% 3,189 7,726 8,035 8,357 8,691 9,039 9,400 9,776 10,167 10,574 Other?bill per patient $38,500 1.3% 548 1,424 1,480 1,540 1,601 1,665 1,732 1,801 1,873 1,948 Indigent?bill per patient $35,000 1.3% 111 288 299 311 323 336 350 364 378 394 Total Revenue (000 omitted) 7,035 17,665 18,372 19,107 19,871 20,666 21,493 22,352 23,246 24,176 Less Uncollectable 1% 70 177 184 191 199 207 215 224 232 242 Total Net Revenue (000 omitted) 6,965 17,489 18,188 18,916 19,672 20,459 21,278 22,129 23,014 23,935 EXPENSES Annual Incr Salary, Wage, Benefits (based on $ per employee) $60,250 3% 3,760 6,516 6,980 7,477 8,009 8,580 9,190 9,845 10,546 11,297 Supplies, Drugs, Food (% net revenue) 16.3% 1,135 2,851 2,965 3,083 3,207 3,335 3,468 3,607 3,751 3,901 Management Fees (% net rev) 8% 557 1,399 1,455 1,513 1,574 1,637 1,702 1,770 1,841 1,915 Operating Expenses (fixed + 7 % net rev) $1,200,000 NA 1,688 2,424 2,473 2,524 2,577 2,632 2,689 2,749 2,811 2,875 Land Lease per year $200,000 3% 200 206 212 219 225 232 239 246 253 261 Depreciation (straight line 30yrs) $15,000,000 500 500 500 500 500 500 500 500 500 500 Total Expenses (000 omitted) 7,840 13,896 14,585 15,316 16,092 16,915 17,789 18,717 19,702 20,749 Total Expenses 7,840 13,896 14,585 15,316 16,092 16,915 17,789 18,717 19,702 20,749 Operating Profit (804) 3,769 3,787 3,791 3,779 3,751 3,703 3,635 3,544 3,427 Operating Margin -11.4% 21.3% 20.6% 19.8% 19.0% 18.1% 17.2% 16.3% 15.2% 14.2%Net Working Capital Notes: Accounts Receivable 30 days 572 1,437 1,495 1,555 1,617 1,682 1,749 1,819 1,892 1,967 Inventory Supplies, Drugs, Food 60 days 187 469 487 507 527 548 570 593 617 641 Accounts Payable 30 days 93 234 244 253 264 274 285 296 308 321 Net Working Capital 666 1,672 1,739 1,808 1,880 1,956 2,034 2,115 2,200 2,288 Change in NWC 666 1,006 67 70 72 75 78 81 85 88 Free Cash Flows Calculation Operating Profit (804) 3,769 3,787 3,791 3,779 3,751 3,703 3,635 3,544 3,427 Add Depreciation 500 500 500 500 500 500 500 500 500 500 Less Capital Expenditures (7,500) (7,500) 0 0 0 0 0 0 0 0 0 Less Increase in Net Working Capital (666) (1,006) (67) (70) (72) (75) (78) (81) (85) (88)Free Cash Flows (000 omitted) (7,500) (8,470) 3,263 4,220 4,221 4,207 4,176 4,125 4,054 3,959 3,839 NPV (no recovery in year 10) $5,687 (000 ommited) IRR (no recovery in year 10) 17.6% Year 1 2 3 4 5 6 7 8 9 10 NWC Recovery 0 0 0 0 0 0 0 0 0 $2,288 Sale of Facility at Book Value 0 0 0 0 0 0 0 0 0 $10,000 NPV with Year 10 Recovery $10,425 (000 ommited) (7,500) (8,470) 3,263 4,220 4,221 4,207 4,176 4,125 4,054 3,959 16,127 IRR with Year 10 Recovery 21.2% Net Profit (Operating Profit - Interest) (000 ommited) (2,004) 2,569 2,587 2,591 2,579 2,551 2,503 2,435 2,344 2,227 Net Profit/Net Revenue -28.8% 14.7% 14.2% 13.7% 13.1% 12.5% 11.8% 11.0% 10.2% 9.3%Study the above analysis carefully, examining the inputs, outputs, and formulas used to do the calculations. Q1a Mulroney did not use working capital cash flows in her original analysis. The analysis above includes incremental investment in working capital. Discuss why she was either correct or incorrect not to include them. Q1b Compare the decision metrics NPV & IRR for the "no recovery of NWC" and "recovery of NWC" scenarios, stating which scenario best captures reality. Based on your answer, give the project a green or red light. Q1c Examine the decision metric 'profit margin', and explain if it leads to a green or red light for this project. Even though the board of directors uses this metric, it is defective. Explain why. HINT: FCF definition. Q1d Reconcile your answers to Q1b and Q1c.Q2a Calculate the K-wacc for HCA using the template above. Enter the data that you have in the case and the table above. If you need additional data, assume it using your good judgment from what you have learned so far in the course. In the answer box, cite your result, compare it to the K-wacc used in the Q1 analysis, and explain how your revised K-wacc would change the Q1 results.Q2b If LATC was a project in a for-profit hospital like HCA above, would the NPV be higher or lower? Explain 'analytically' by examining all relevant inputs to NPV. Q2c If LATC was a project in a for-profit hospital like HCA above, would the IRR be higher or lower? Explain. HINT: To avoid getting trapped by this question, make sure your answer is'analytical', i.e., examine all relevant inputs and output. Q2d Can a non-profit hospital accept projects that a for-profit hospital would reject?Q3a The analysis above is identical to the one on the Q1 tab. Do a sensitivity analysis by systematically changing certain assumptions in the spreadsheet above: 1 change the K-wacc to 8.3% 2 change year 2 utilization to 45% 3 change commercial payers to 30% of patient mix Use the answer box to prepare a summary of the original (Q1) results and the revised (Q3) results, i.e., a summary table.Q3b Revise the decision you made in Q1 based on the above sensitivity analysis, comparing Mulroney's assumptions and the sensitivity analysis assumptions to expectations stated in the case. Be sure to consider both 'hard quantitative data" from decision metrics and 'soft qualitative information' from the case.

 

Paper#48796 | Written in 18-Jul-2015

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