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Conduct of Net Present Value Analysis

The Vice president of your division wishes to propose the implementation of a new service for your health care organization and has assigned the project to you. You have gathered all the information necessary to submit the proposal as part of the budget process for next year. You have determined that the new service will require an investment $380,000 for equipment and start-up costs. The equipment will have a seven-year life and would provide capacity for 10,600 procedures per year.

You have assessed the market for the new service and have determined that there are already three providers in the market, but that the market is growing and there is some unmet need. You have determined that the market average price for the services is $89.00 per procedure. You have also prepared a pro forma operating budget that shows that the variable costs will be $45.00 per procedure and that fixed costs, excluding depreciation, will be constant at $40,000 for the first 3,400 procedures and will then increase by $25,000 for each increment of 1,200 procedures thereafter.

The vice president has provided you with the following volume estimates and says we should assume that the program would be considered mature and volume would stabilize in year three:

Year Procedures
1 3,400
2 4,600
3 5,800

The financial policy of your health care organization stipulates that proposed capital projects must produce a positive cumulative net present value for their first five years of operation using the currently approved discount factor. The discount factor specified for next year's budget proposals is 8%.

Assignment:
A. Complete a net present value analysis of the proposed new service.
B. If the project fulfills the financial policy stated above, prepare a short report of the CFO proposing the inclusion of new service in the capital budget for next year. If the project does not fulfill the stated policy, prepare a short report to the Division Vice President explaining the results of your analysis with any suggestions you might make to improve the viability of the project. In either case, be sure to include appropriate schedules demonstrating your analysis.

Solution Preview

A. Complete a net present value analysis of the proposed new service.

**Please see the attached excel file for the analysis.

B. If the project fulfills the financial policy stated above, prepare a short report of the CFO proposing the inclusion of new service in the capital budget for next year. If the project does not fulfill the stated policy, prepare a short report to the Division Vice President explaining the results of your analysis with any suggestions you might make to improve the viability of the ...

Solution Summary

Solution helps in computing and doing Net Present Value Analysis

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