Q1a Mulroney did not use working capital cash flows in her original analysis. The analysis above includes incremental investment in working capital. Discuss why she was either correct or incorrect not to include them.
Mulroney did not use working capital cash flows in order to show the unlevered cash flow (CF) or CF without financing. She omitted the interest expense. Without net working capital, she cannot correctly estimate the net working capital (NWC). The NWC rises with a new project such as acute care hosptal since increased volume of business will lead to increased revenue generated. Thus, increase in revenue will increase NWC. In C73, the NPV is $5,687 since does not include NWC, it is much less than NPV with NWC which is C80 and is $10,425. Thus, the incremental increase in NPV is important in estimating the net present value of the business. Similarly, IPV must also use NWC otherwise the rate of return is underestimated, i.e., 17.6% (C74) vs. 21.2% (C81).
Q1b Compare the decision metrics NPV & IRR for the "no recovery of NWC" and "recovery of NWC" scenarios, stating which scenario best captures reality. Based on your answer, give the project a green or red light.
Q1c Examine the decision metric 'profit margin', and explain if it leads to a green or red light for this project. Even though the board of directors uses this metric, it is defective. Explain why. HINT: FCF definition.
Q1d Reconcile your answers to Q1b and Q1c.
Q2a Calculate the K-wacc for HCA using the template above. Enter the data that you have in the case and the table above. If you need additional data, assume it using your good judgment from what you have learned so far in the course.
In the answer box, cite your result, compare it to the K-wacc used in the Q1 analysis, and explain how your revised K-wacc would change the Q1 results.
Q2b If LATC was a project in a for-profit hospital like HCA above, would the NPV be higher or lower? Explain 'analytically' by examining
all relevant inputs to NPV.
Q2c If LATC was a project in a for-profit hospital like HCA above, would the IRR be higher or lower? Explain.
HINT: To avoid getting trapped by this question, make sure your answer is 'analytical', i.e., examine all relevant inputs and output.
Q2d Can a non-profit hospital accept projects that a for-profit hospital would reject?
Q3a The analysis above is identical to the one on the Q1 tab.
Do a sensitivity analysis by systematically changing certain assumptions in the spreadsheet above:
1 change the K-wacc to 8.3%
2 change year 2 utilization to 45%
3 change commercial payers to 30% of patient mix
Use the answer box to prepare a summary of the original (Q1) results and the revised (Q3) results, i.e., a summary table.
Q3b Revise the decision you made in Q1 based on the above sensitivity analysis, comparing Mulroney's assumptions and the sensitivity analysis assumptions to expectations stated in the case.
Be sure to consider both 'hard quantitative data" from decision metrics and 'soft qualitative information' from the case.
Download:- Financial Management problem.xlsx