1. Benefit-cost Analysis

Park Crest Hospital is looking into the possibility of upgrading its patient tracking information system. The current system is a management information system (MIS) that maintains records on the active status of patients residing in the hospital at a given moment. It ties into patient medical treatment files and financial history files. Thus it is possible to determine the current disposition of patients residing in the hospital (e.g., room number, telephone number, attending physicians, attending nurses, etc.); to access facts about the patient’s prior medical history; and to access financial data on current and past charges made to the patient.

The current MIS is more than seven years old. In view of changes in information storage and retrieval technology that have recently occurred, as well as the current system’s inability to deal with changes that have been made to handle the patient medical treatment files, Park Crest management has decided to upgrade its patient tracking information system. Dr. Ralph Kopecky is made head of a task force to identify possible systems that can replace the existing one.

A one-month search unearths two products that are good candidates. Each is an off-the-shelf product that will be modified by the vendor to fit into a client’s existing environment. After lengthy discussions with the vendors, Dr. Kopecky developed the cost and benefit data that appear in the accompanying exhibit. He will employ these data to educate members of the Executive Management Committee about costs and benefits associated with the alternative solutions.

Questions:

1. Using the data contained in the exhibit, compute the benefit-cost ratios associated with adopting System A and System B.

2. Given the data contained in the exhibit, does it make sense from a financial perspective to abandon the current MIS and to adopt a new one? Explain your reasoning.
3. Using the data contained in the exhibit, which solution – System A or System B – is more attractive from a purely financial point of view? Write up your views in a one-page, single-spaced report that will be submitted to the Executive Management Committee.
4. What are the limitations of taking a purely financial approach to selecting a product that will enable Park Crest Hospital to meet its business needs? What other factors should be taken into account?

'Risk management is not about elimination of risk', Discuss in detail

Consider a two-period binomial model in which a stock currently trades at a price of K65. The stock price can go up 20 percent or down 17 percent each period. The risk-free rate is 5 percent. Calculate the price of a put option expiring in two periods with exercise price of K60.

What does a beta coefficient measure?

(This will be a presentation question, please guide thoroughly. Thank you!)

Assume that sales will grow at 5.00%. The following accounts (cash, accounts receivable, inventory, net fixed assets, accounts payable and accruals, as well as operating costs) are assumed to change with sales and will maintain their current percentage of sales rates into 2016. The dividend payout ratio will remain the same. Long-term debt and notes payable will remain constant into 2016 as will interest expense, as a result. The firm also does not plan to issue any additional common stock or conduct any share repurchases. The firm’s tax rate is 40%. Any additional funds needed will be sourced through a line-of-credit (LOC) and surpluses will be paid out through a special dividend.

BALANCE SHEET AS OF 12/31/2015:

In the following questions, determine the percentage-of-sale forecast factors:

Describe how, by use of the capital asset pricing model, you might select a suitable
risk discount rate to use in profitability measurement.

(This will be a presentation question, please guide thoroughly. Thank you!)

Describe the advantages and disadvantages to existing shareholders of funding expansion using convertible loan stock.

(This will be a presentation question, please guide thoroughly. Thank you!)

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $350,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows: Product Selling Price Quarterly Output A $ 16 per pound 15,000 pounds B $ 8 per pound 20,000 pounds C $ 25 per gallon 4,000 gallons Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below: Product Additional Processing Costs Selling Price A $ 63,000 $ 20 per pound B $ 80,000 $ 13 per pound C $ 36,000 $ 32 per gallon Required: 1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point? 2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?

1. Assuming the Efficient Markets Hypothesis correctly describes financial markets, what implications does this have for the performance of active portfolio managers?  What types of returns should investors expect to earn if the EMH is correct?

Find the present value of payments of $250 every six months starting immediately and continuing through 6 years from the present, and $200 every six months thereafter through 12 years from the present. if i^(2) = 4%.

An automobile manufacturer is considering one of two systems for its windshield assembly line. The first is a robotic system that should save money due to a reduction in labor and material cost. This robotic system will cost $400,000. Current practice is to recover this cost over the first two years. One full-time technician and one full-time material handler will be needed with this system. The full-time technician costs $60,000 per year and the material handler costs $52,000 per year.

If the company selects the manual system, it will need four full-time material handlers at a cost of $52,000 each per year. If the manual system is selected, the company will incur additional costs of $0.50 per windshield installed. (Hint: This is the savings referred to in the first paragraph.)

Q.1) Suppose that the company is going to produce 9,000 windshields per month. How much would the robotic design have to save per unit in order for the company to be indifferent between the two design options?

Q.2) For the manual design and with the current price of $9.50 per unit, the marketing group has said that there is a demand for 8,000 units per month. However, if the company were to drop the price by $0.25 per unit and adopt the robotic design, the demand would increase to 9,000 units per month. The other information for the robotic design is provided in a) above. Looking at these two options, which strategy should the company adopt? All of the other information provided in part a) applies in this analysis. Show your work supporting your decision.

1. If I were to provide you with 50 years of monthly returns on the S&P500 and on the Barclays Aggregate Bond Index, how would you go about calculating the efficient frontier of investment opportunities?  By that I mean, determine
   1. What variables you need to calculate from the return data?
   2. What optimization problem would you need to solve, i.e., what are you going to maximize or minimize?
   3. What restrictions would you need to place on the optimization problem?
   4. How would you determine the starting point of the efficient frontier?

If I asked you to determine the optimal portfolio for a client, what information would you need?  Once that information is provided, what optimization problem would you solve to identify the optimal portfolio (what are you going to maximize or minimize)?  What constraints would you place on this problem?

Your company is considering the development of an electric bicycle. The development will take four years and cost $100,000 per year. Once developed, the company expects to generate a positive cash flor of $150,000 per year for ten years. The cost of capital is 10%; assume all cash flows occur at the end of each year. What is the Net Present Value of the electric bicycle? Should the company invest in this product?

You are considering investing in a very risky new venture. The owner wants you to invest $150,000 today, and has promised that you will receive $1,000,000 in 10 years. Because of the high risk of this investment, your required rate of return is 20%. What is the Net Present Value of this investment?