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Florida Keys Case Study

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Florida Keys Hospital
Traditional Project Analysis
This case is a traditional capital budgeting analysis that focuses on the issues of cash flow analysis, profitability and breakeven measures, inflation effects, and risk assessment and risk incorporation—issues that are common to most real asset investment decisions.
You are required to develop a model to calculate the ambulatory surgery center’s net cash flows on the basis of estimated utilization, estimated charges, and other relevant data and then take this data and calculate the NPV, IRR, MIRR, and Payback. You must also perform sensitivity and scenario analyses. You should also provide an analysis of risk and the impact of inflation on project profitability. Your completed assignment will be evaluated on the basis of addressing all of the following (in no particular order):
1. The hospital already owns the site for the center, so should any cost be attributed to the land? Explain.
2. What overhead costs should be included in this analysis?
3. How should the cannibalization of inpatient surgeries be handled?
4. a. What is the project's payback? What is the economic interpretation of payback? What type of information do decision makers get from the payback?
b. What is the project's net present value (NPV)? Explain the economic rationale behind this profitability measure.
c. What is the project's internal rate of return (IRR)? Explain the economic rationale behind IRR. Do the NPV and IRR always lead to the same conclusion about a project's profitability? d. What is the project’s modified internal rate of return (MIRR)? How does MIRR differ from IRR? Which one is a better measure of a project’s true rate of return?
5. To give the board of directors a better feel for the impact of inflation on the outpatient surgery center, prepare a two-variable sensitivity analysis using inflation rate of

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