1. Address the following issues: A) Define the term incremental cash flow. As the project, at least constructively, will be financed in part by debt, should the cash flows include interest expense? Explain.
-Incremental cash flow is the additional operating cash flow that an organization obtains from taking on a new project. Yes the cash flow should include interest expense as burrowing money was a direct result of taking on this project.
B) The hospital already owns the site for the center, so should any cost be attributed to the land? Explain.
-Since the hospital has already paid for the land five years ago, it should now be considered as a sunk cost. The $150,000 payment has already happened and will …show more content…
-Since inflation rate can vary in years, this table gives us an idea of our NPV if there was higher than expected inflation in both revenue and cost. As the inflation rate of revenue goes up, so does the NPV. However when inflation rate of cost rises, NPV will decrease in comparison to the same revenue inflation level.
4. Conduct a sensitivity analysis and interpret your findings. As part of your analysis, create a table and a graph that show the sensitivity of NPV to procedures per day, average net revenue per procedure, and salvage value. Assume that each variable can deviate from its base case by +/- 10%, +/- 20%, and +/-30%.
-From this sensitivity analysis, we can see that the outpatient ambulatory center project’s NPV is largely affected by changes in volume and revenue, with revenue being most affected. The variable with the least impact is the salvage value of the equipment and land. The results shown here is what a manager might expect because the salvage value is a single cash flow where the other two, volume & revenue influences the cash flow in each year of the project’s operations.
5. Conduct a scenario analysis and interpret your findings.
-The CV value puts the project risk on a scale ratio that is to be used in comparison of the average CV value for the hospital’s other project. If the CV of this project were