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Uva Executive Summary

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EXECUTIVE SUMMARY
Background and Key Issues: In 2006, the project “long-term acute care” (LTAC) was prepared to propose to University of Virginia Health System. The central issues include whether the LTAC facility will be profitable for U. Va. Health System, whether the projected profit margin is above the minimum 5%bottom line with an adequate coverage of interest expense from $15 million debt-financed.
Analysis: The NPV generated from launching LTAC facility is forecasted as $24.7 million by the discount rate of 7.84%. Internal rate of return (IRR) is found to be 9.78%, above the discount rate which indicates a positive return on LTAC project. The present value of the perpetuity is projected to be $23.3 million, discounting back all the future cash flows with 5% long-term growth rate and WACC derived from the average of for-profit health care companies’ financials. The perpetuity at year 10 takes into consideration of the potential capital expenditure $3 million on renovation and maintenance of LTAC facility, which is assumed to be 20% of the initial $15 million construction cost. Profit margin becomes higher than the required 5% from the second operating year and continues increasing after covering the interest expenses, as shown in the table below.

The key drivers of NPV are identified to be utilization rate and the mix of “commercial payers” with “other”. The current NPV is acted as the base case, assuming the utilization rate is 60% in year 2 and increases 4% till reaching the maximum 90% in year 10, and the mix of commercial payers with others is 24% versus 9%. In the best scenario in regards of utilization, the estimated rate in year 2 starts at 70% increasing 3% till 90% maximum. Worst case happens when the utilization starts at 50% and increasing 3%. For the second driver-payer mix, the best scenario occurs when the mix between

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