Palms Hospital Analysis Essay

2133 Words Jul 16th, 2010 9 Pages
| Palms Hospital |
Memo
To:
From:
CC:
Date: [ 7/30/2010 ]
Re: Ambulatory Surgical Center
Executive Summary
The Palms Hospital is considering an expansion project that would utilize land previously purchased. By expanding into ambulatory surgical services, the hospital has the opportunity to increase revenues and capture market share in this area. Investigation in the NPV of the project and a scenario analysis reveal that the project would be profitable.
Debt Financing
This project will most likely involve debt financing. This means that interest expense would occur and should be taken into account in the analysis of the project. Interest expense is a cash expense and is automatically included when the net cash flows are
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Sensitivity Analysis
Sensitivity analysis, a risk assessment tool, indicates exactly how much a project’s profitability will change in response to a given change in a single input variable, with all other input variables held constant. Sensitivity analysis can explain the impact of volume and salvage value fluctuations. It provides an understanding for which of the variables will have the greatest impact on the project’s profitability – the larger the NPV change for a given percentage input change, the greater the impact. It provides valuable information in two main ways. It provides some breakeven information about the project’s uncertain variables. Secondly, it helps identify input variables that are most critical to the project’s profitability and the project’s financial success.
Sensitivity analysis begins with the base case (or for this analysis, the “most likely case”) developed using expected values for all uncertain variables. The uncertain variables used in this analysis are procedures per day, average net revenue, and building/equipment salvage value.
Procedures Per Day Procedures Per Day | Number | NPV | NPV Change | IRR | IRR Change | 10 | $ (3,928,100) | $480,312 | -4.1% | | 15 | $ (1,526,540) | $2,401,560 | 4.7% | 8.8% | 20 | $ 875,020 | $2,401,560 | 12.9% | 8.2% | 25 | $ 3,276,580 | $2,401,560 | 20.7% | 7.8% | 30 | $ 5,678,140 | $2,401,560 | 28.1% | 7.4%
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