HCM301 CSU Understanding Healthcare Financial Management Analysis

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Chapter 12 — Project Risk Analysis

PROBLEM 3

Consider the project contained in Problem 7 in Chapter 11 (California Health Center).

a. Perform a sensitivity analysis to see how NPV is affected by changes in the number of procedures per

day, average collection amount, and salvage value. Remember supplies vary with number of procedures.

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. Furthermore, the following data were developed:

Equipment

Number of

Average

Salvage

Scenario

Probability

Procedures

Collection

Value

Worst

0.25

10

$60

$100,000

Most likely

0.50

15

$80

$200,000

Best

0.25

20

$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. (Hint: Coefficient of variation is defined as the standard deviation of NPV divided

by the expected NPV.) The hospital adjusts for risk by adding or subtracting 3 percentage points to its

10 percent corporate cost of capital. After adjusting for differential risk, is the project still profitable?

d. What type of risk was measured and accounted for in Parts b. and c.? Should this be of concern to the

hospital’s managers?

ANSWER

9/1/14

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Chapter 14 — Financial Forecasting

PROBLEM 1

Florida Home Health is a small home care agency owned by a group practice of nurses and physical

therapists in Tampa, Florida. During the past few years, the company reported the following revenues:

Year

Revenues (thousands)

1

$2,058

2

$2,534

3

$2,472

4

$2,850

5

$3,000

6

?

Predict Florida Home Health’s Year 6 revenue.

ANSWER