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

Year Prob = 0.2 Prob = 0.6 Prob = 0.2

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

2 20,000 30,000 40,000

3 20,000 30,000 40,000

4 20,000 30,000 40,000

5 30,000 40,000 50,000

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

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.)

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

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

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

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?

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).

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

B. What is the firms current receivables balance?

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?

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.