CASE 26 QUESTIONS
JOHNSON MEMORIAL HOSPITAL
Competing Technologies with Backfill
1. Explain the term backfill.
2. Consider the base case situation for the first system to be acquired.
a. What are the net present values (NPVs) and internal rates of return (IRRs) of the two alternative
technologies? What factor drives the financial superiority of the more profitable technology?
b. What is the incremental NPV of solid-state versus water perfusion technology? What does the
incremental NPV tell us?
3. Solid-state technology allows for expanded volume. Assess the sensitivity of the decision to the number
of additional tests performed. To do this, assume that the number of additional tests could be as low as
50 or as high as 150. Also, what would be the result if no additional tests were performed?
4. Now consider the backfill assumption. Assess the sensitivity of the decision to the number of additional
bed days. What if the number of additional bed days were as low as 80 or as high as 175? What if no
additional bed days resulted from the backfill opportunity? What is the break-even number of bed days,
that is, the number at which the hospital is indifferent between the two technologies?
5. Do the two systems have the same financial risk? (Put another way, are the cash flows being
discounted equally risky?) If not, why? Modify your analysis to incorporate differential risk if you believe
6. What is your final recommendation regarding replacement of the first system?
7. Now consider the second proposed (water perfusion) system acquisition.
a. Should this system be purchased?
b. Explain why and how this analysis differs from the one conducted in question 2.
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