Cases in Healthcare Finance
Cases in Healthcare Finance Copyright 2014 Health Administration Press
CASE 21 QUESTIONS
NATIONAL REHABILITATION CENTERS Staged Entry Analysis
business line. What is Stage 1’s freestanding expected NPV? Based on your financial analysis thus far, is Proposal B acceptable?
average risk. c. For ease of analysis, Stage 2 has been treated as if it could be undertaken independently.
Is this a realistic assumption? Does the stand-alone profitability of Stage 2 have any value in the decision process?
analysis. What is the overall expected NPV of Proposal B? 5. Use the decision tree data to find Proposal B’s standard deviation and coefficient of variation of
NPV. Should Proposal B be classified as a high-, average-, or low-risk project? (For now, disregard the abandonment option.)
option.) 7. Now consider the impact of abandonment at the end of Year 8. a. What impact does the abandonment option have on the overall project’s risk and return?
(Hint: Return to the 10 percent unadjusted discount rate.) b. What is the value of the abandonment option? 8. a. What type of risk was measured in the analysis? Is this appropriate? If not, how could you
measure the relevant risk of the project? b. In the analysis, you probably applied a single differential risk-adjusted discount rate to all
cash flows, that is, to the cash flows of both stages. Does this make sense? 9. Describe the advantages and disadvantages of Proposal A (single, large investment) versus
Proposal B (staged entry). Based on the limited amount of information available, what do you think the company should do? Carefully justify your final recommendations.
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