2024 – 2 Heywood Diagnostic Enterprise is evaluating a project with the following net cash flows

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2.  Heywood Diagnostic Enterprise is evaluating a project with the following net cash flows and probabilities:

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Year      Prob = 0.2                Prob = 0.6                Prob = 0.2

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 1          ($100,000)                ($100,000)               ($100,000)

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 2            20,000                       30,000                      40,000

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 3            20,000                       30,000                      40,000

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 4            20,000                       30,000                       40,000

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 5             30,000                       40,000                       50,000

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The Year 5 values include salvage value. Heywood’s corporate cost of capital is 10%.

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a. What is the project’s expected (i.e., base case) NPV assuming average risk? (Hint: The base case net cash flows are the expected cash flows in each year.)

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b. What are the project’s most likely, worst, and best case NPV’s?

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c. What is the project’s expected NPV on the basis of the scenario analysis?

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d. What is the project’s standard deviation of NPV?

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e. Assume that Heywood’s managers judge the project to have a lower than average risk. Furthermore, the company’s policy is to adjust the corporate cost of capital up or down by 3 percentage points to account for differential risk. Is the project financially attractive?

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Annual net patient service revenues

3.Fargo Memorial Hospital has annual net patient service revenues of $14,400,000. It has two major third-party payers, plus some of its patient is self-payers. The hospitals patient accounts manager estimates that 10% of the hospitals paying patients (its self payers) pay on Day 30, 60, percent pay on Day 60 (Payer A), and 30% pay on Day 90 (payer B).

(Five percent of total billings end up as bad debt losses, but that is not relevant for this problem).

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A. What is Fargo s average collection period ? (Assume 360 days per year throughout this problem).

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 B. What is the firms current receivables balance?

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 C. What would be the firms new receivables balance if a newly proposed electronic claims system resulted in collecting from third-party payers in 45 and 75 days, instead of in 60 and 90 days?

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D. Suppose the firms annual cost of carrying receivables was 10%. If the element claims system costs $30,000 a year to lease and operate, should it be adopted (Assume that the entire receivables balance has to be financed.

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