Reference no: EM13829179

15.1) The managers of Merton Medical Clinic are analyzing a proposed project. The project's most likely NPV is $120,000, but as evidenced by the following NPV distribution, there is considerable risk ivolved:

                        Probability                             NPV

                            0.05                                     ($700,000)

                           0.20                                      (250,000)

                           0.50                                      120,000

                           0.20                                      200,000

                           0.05                                      300,000

a.       What are the project's expected NPV and standard deviation of NPV?

b.      Should the base case analysis use the most likely NPV or the expected NPV? Explain your answer.

15.2) Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities:

 

            Year                Prob = 0.2                  Prob = 0.6                  Prob = 0.2

              0                    ($100,000)                 ($100,000)                 ($100,000)

              1                       20,000                           30,000                     40,000

              2                       20,000                          30,000                      40,000

              3                       20,000                          30,000                      40,000

              4                       20,000                          30,000                      40,000

              5                       30,000                          40,000                      50,000

            The Year 5 values include salvage value. Heywood's corporate cost of capital is 10 percent.

a.       What is the project's expected (i.e., base case) NPV assuming average risk? (Hint:  The base case net cash flow are the expected cash flow in each year.)

b.      What are the project's most likely, worst, and the best case NPV's?

c.       What is the project's expected NPV on the basis of the scenario analysis?

d.      What is the project's standard deviation of NPV?

e.       Assume that Heywood's managers judge the project to have lower-than-average risk. Furthermore, the company's policy is to adjust the corporate cost of capital up or down by 3 percentage points to account for differential risk. Is the project financially attractive?

16.6) Fargo Memorial Hospital has annual net patient service revenues of $14,400,000. It has two major third-party payers, plus some of its patients are self-payers. The hospital's patient accounts manager estimates that 10 percent of the hospital's paying patients (its self-payers) pay on Day 30, 60 percent pay on Day 60 (Payer A), and 30 percent pay on Day 90 (Payer B). (Five percent of total billings end up as bad-debt losses, but that is not relevant for this problem.)

a.       What is Fargo's average collection period? (Assume 360 days per year throughout this problem.)

b.      What is the firm's current receivables balance?

c.       What would be the firm's new receivables balance if a newly proposed electronic claims system resulted in collecting from third-party payers in 45 and 75 days, instead of in 60 and 90 days?

d.      Suppose the firm's annual cost of carrying receivables was 10 percent. If the electronic claims system costs $30,000 a year to lease and operate, should it be adopted? (Assume that the entire receivables balance has to be finaced.)