1. What is “incremental cash flow”? Because the project, at least constructively, will be financed in part by debt, should the cash flows include interest expense? Think about why or why not . . .
2. The hospital already owns the site for the center, so should any cost be attributed to the land? Why or why not . . .
3. What overhead costs should be included in the analysis?
4. How should the cannibalization of inpatient surgeries be handled?
5. What is the project’s payback? What is the economic interpretation of payback? What type of information do decision-makers get from the payback?
6. What is the project’s net present value (NPV)? Explain the economic rationale behind this profitability measure.
7. What is the project’s internal rate of return (IRR)? Explain the economic rationale behind IRR. Do the NPV and IRR always lead to the same conclusion about a project’s profitability?
8. What is the project’s modified internal rate of return (MIRR)? How does MIRR differ from IRR? Which one is a better measure of a project’s true rate of return?
9. Construct an inflation impact table.
10. Conduct a sensitivity analysis—creating a table and/or graph that shows the sensitivity of NPV to procedures per day, average charge, and salvage value. Assume that each variable can deviate from its base case value by +/-10, +/-20, and +/-30 percent. Discuss the advantages and disadvantages of sensitivity analysis.
11. Conduct a scenario analysis using the following assumptions:
Worst case: probability of outcome = 0.2
Most likely: probability of outcome = 0.6
Best case: probability of outcome = 0.2
Does the expected NPV obtained here agree with the base case NPV? If not, why? Discuss the advantages and disadvantages of scenario analysis.
12. Should the ambulatory surgery center be classified as high risk, average risk, or low risk on the basis of the analysis thus far? (hint: look at the coefficient of variation calculated earlier).
13. What additional data would you seek from other hospital staff members to conduct a more thorough analysis? Can you think of any costs that might be associated with the project that have not been included in the analysis? Are there any potential benefits that have not been included? What qualitative factors should the board consider in making the final judgment on the project?