FNCE90060 - Financial Management & Calabash Community Hospital Case Study With Discounted Cash Flow (DCF) - Accounting Assignment Help
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Ambulatory surgery center (ASC)
This assignment is due by 5pm AEDT (Melbourne time) Tuesday 13 April 2021. Submit a PDF file only (no Word, Excel, or anything else) via the LMS. If your computer is not set up to make PDFs, search the web for “pdf converter”, there are numerous free online services that allow you to create them.
Please note that this is a group assignment, groups may consist of four students maximum. Students impacted by travel restrictions should complete the assignment remotely. We would encourage all students, even remote ones, to work on the assignments in groups, but groups of 1 are also permitted. The LMS provides space where groups can chat and share files.
This assignment is part of your assessment and should only reflect the work of your own group. Plagiarism is a serious offense and will be penalized. Please visit http://academicintegrity.unimelb.edu.au/ if you have questions about what constitutes plagiarism.
Please also be sure to write clearly and concisely. Unnecessarily long, meandering, or unclear answers will be penalized. You will not, however, be evaluated on visual presentation. A simple, typed document will be good enough. Please note that your assignment must be typed and any handwritten assignment, scanned assignment or anything with screenshots/photos will receive a mark of zero. To receive full credit, show all of your work. If using a spreadsheet, consider identifying the commands and parameters used eg by using the Excel comment directive (apostrophe) eg: ‘=sum(y1:y2):
Calabash Community Hospital
The objective of this case is to give students the opportunity to apply capital budgeting techniques discussed in class for estimating discounted cashflows and estimating Net Present Value.
Read the case ”Calabash Community Hospital” (the case can be downloaded from the LMS). The case considers a potential $10 million investment in an outpatient ambulatory surgery center (ASC) by a not-for-profit community hospital in rural South Carolina in the United States. Before making a decision to proceed with the investment, a member of the purchasing department, R. D. Scott, is invited to complete a discounted cash flow (DCF) analysis of the investment opportunity to help quantify the financial costs and benefits of the project in this not-for-profit context. The analysis maintains substantial uncertainty regarding a number of key parameters.
The main assumption in the case is that Calabash Community Hospital remains a not-for-profit organization, and is therefore exempt from paying corporate taxes. Question 2 below involves estimating the discounted cashflows where corporate taxes can be ignored. In Question 4 however, we consider the scenario where Calabash is a for-profit organization and therefore required to pay corporate taxes. These two scenarios give students insights into the role played by taxes in the capital budgeting process.
- Calabash’s revenues consist of net reimbursements paid by insurance companies for each procedure (ie, the patients themselves do not pay the hospital directly). o Calabash is currently unlevered, but to finance the construction of the new ASC,
- Calabash will borrow $5,000,000 in 2021 (Year 0) at an APR of 5.3% (compounded semiannually). This loan will be amortized over 9 years.
- Opportunity costs and project externalities not discussed in the case can be ignored
- Accounts Receivable can be estimated for each year as follows: [(net reimbursements)x(Account receivable days)/365]
- Assuming 2021 is Year number 0, 2022 is Year number 1, etc, then the payback period is estimated as follows:
- [(the number of the Year of last negative net invested cash) +
- (the absolute amount of last negative net invested cash / next year’s cash.
a. What is the EAR for the loan that Calabash will use to fund the new ASC? b. What is Calabash’s semiannual payment to the bank?
c. How much interest will Calabash have paid over the life of the loan? d. How will interest payments impact the NPV estimates for the new ASC?
2. a. Create a Discounted Cashflow analysis table showing the ASC‘s unlevered net income and free cash flows for the years 2021-2030. Use the base case assumptions agreed by the team in the case. Show clearly how each row or value in the DCF table is derived from the data in the case.
b. Using CFO Emily Tang’s estimate of the discount rate, find the NPV of the investment. According to the NPV rule, should Calabash proceed with the new ASC?
3.Scott and the team make simplifying assumptions about the values of a number of key variables where a range of values are possible (reimbursement growth rate, the effect on in-patient hospital profits). Use the minimum and maximum values given in the case for each variable to estimate the sensitivity of the NPV estimate to these variables.
4. [3 marks]
Unknown to Scott and most of the Calabash staff, the hospital board commissioned a secret report from MacKenzie Management Consultants about converting the hospital into a for-profit organization. This idea is strongly (but secretly) supported by the Calabash CEO as it includes generous bonus incentives if certain financial targets are achieved. Under this scenario, MacKenzie make the following assumptions: Calabash could add an extra floor to the new ASC for an additional $3 million (bringing construction costs and equipment acquisition in 2021 to $12.5 million). Then Calabash would be able to conduct 3000 procedures per year in 2023, and an advertising campaign costing $1 million per year is expected to drive 10% annual growth in the total number of procedures per year. Furthermore, the salvage value of the ASC would increase to $10 million. However fixed costs in 2023 are expected to be $3 million. MacKenzie estimates Calabash’s tax rate would be 35% and the discount rate would then be 5%. All other data and assumptions remain the same as the base-case non-profit scenario.
a. Use the MacKenzie assumptions to estimate the free-cash-flows for each year from 2021 to 2030.
b. What is the NPV?
c. Compute the following:
i. Internal Rate of Return (IRR)
ii. Payback period
iii. Profitability index
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