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    Developing a Forecasting Model

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    A regional hospital is considering the expansion of the ER to accommodate an expected increase
    in patient loads. Fixed (up-front) costs are equally likely to be any value between 1 and 1.5
    million $. For the first year of the project, average variable cost per visit and revenue per visit
    are expected to be $55 and $165 respectively. The chief financial officer estimates that variable
    costs will increase between 5 and 6 percent per year due to inflation (inflation rate can change
    each year to a value between 5 and 6 percent. All values within this range are equally likely).
    However, because of growing regulatory pressure and managed care contracting, average
    revenue per visit is not expected to increase for the next five years.

    Using a forecasting model to study the trend in demand for the ER, the hospital estimates that the
    mean volume of visits to the ER will increase by 2,000 visits per year during the next 5 years.
    This increase will have to be absorbed by the ER expansion, so the mean of the predicted
    volume for the expansion during the first year of operations is 2,000 visits; in year two it's 4,000
    visits, and so on. They also estimate that these annual number of visits are normally distributed
    with a standard deviation of 250 visits. You may assume that a particular year's volume is
    independent of other years' number of visits. The hospital discounts fiiture cash flows at 10
    percent per year.

    Analyze this problem using @RISK with 5,000 replications and answer the following questions:
    a) What is the probability that the ER expansion generates positive net discounted profits at the
    end of the third year of operations?
    b) Produce a graph showing the distribution of net discounted profits at the end of the fifth year
    of operations.
    c) Give a 95% confidence interval for the net discounted profits at the end of the fifth year of

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    Solution Preview

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    Hi, please see the attached Excel sheet. The cell formulas in blue use @Risk inputs, and the cells in ...

    Solution Summary

    In this solution, we show how to construct a forecasting model and use it to determine whether a hospital expansion will be profitable.