Question

Central Hospital - A Capital Budgeting Analysis Objective Central Hospital, established in 1904, is the premier hospital in Oklahoma City specializing in cardiology. Patients travel from all over the county to be diagnosed for rare heart conditions and receive treatment from Central's leading staff of doctors and nurses. The hospital receives an influx of over 25,000 visitors each year and has grown rapidly since its establishment. In an effort to diversify, Zach Moore, CEO, is considering a $12 million investment to acquire an existing clinic. The institution will be renamed Thatcher Clinic, in memory of Central's late UCO President, Richard Thatcher, and treat the public for general illnesses and diseases. The appropriate WACC of the project is 15%. Central Hospital is a for- profit company and has a marginal tax rate of 40%. Should Central Hospital proceed with the Thatcher Clinic project? Operating Cash Flows - All revenues and expenses occur at year-end and begin at the end of the first year Revenues: One of the key features of the target clinic is its enormous space. The clinic is capable of treating 70,000 patients a year and is expandable to accommodate 90,000 patients through the use of foldout beds and more efficient use of the waiting areas. In order to estimate future profitability, Moore looked at previously recorded patient counts at the clinic. Moore predicts that in the year of Thatcher Clinic's initial opening (t-1), the number of patient visits will be between 50,000 and 60,000 with the most likely number being 53,000. Of these, 40% (60%) are expected to be children (Adults). For the next 5 years (tillt=6), the growth in patient base should be between 2% and 6% with the most likely number being 4%. After that (till perpetuity), the growth rate for Thatcher Clinic is expected to be 3% until the clinic reaches capacity. Although the number of patients is expected to grow each year, the proportion of adult and child patients will remain constant. elab teadult par the sensest rear Pes of Thatcher Clinic will provide general patient-care that includes three types of services: 1) simple procedures, 2) in-house lab tests, and 3) routine checkups. Last year, Central Hospital paid Phillips Consulting $250,000 to conduct market research on the services demanded by patients. Based on their analysis, Moore estimates that 25% of all adult patients are expected to go in for simple procedures. 35% are expected to have in-house lab tests done, and the remaining go in for routine checkups. For children, Moore estimates that 10% are expected to go in for simple procedures, 20% are expected to have in-house lab tests done, and the remaining children have routine checkups. The demand for all patient lab test and simple procedures are normally distributed with standard errors of 2% and 3% respectively. Moore will use these patient behavior trends to forecast its varying revenue streams. This information along with the price of each of these three forms of patient care are available in the chart below. Sthat

Answer 1

1.Capacity Constraint

maximum number of years the clinic will take to reach the capacity of 90,000 is one and half years .

calculation:

clinic receive 25,000 patient every year and it has a capacity of 60,000 patient to accomodate. Therefore,

60,000+60,000=1,20,000.

since, 60,000+30,000=90,000

No the years is 1 year and 6 months

2.calculation of NPV