Question

For this exercise, assume that

The purchase price for the colonoscopy simulator is $4,000

The revenue from each colonoscopy, on average, is $450.

Each colonoscopy requires $200 worth of supplies.

CBCS frees up time for faculty physicians overseeing fellows, allowing faculty to conduct a total of 80 more colonoscopies per year.

Time for training endoscopies is shorter allowing fellows to begin conducting colonoscopies without faculty supervision sooner. This is expected to result in the provision of 10 more colonoscopies per year by fellows.

CBCS improves fellows’ ability to reduce patient pain for the fellow’s first 30 or so procedures (after 30 procedures the performance of CBCS and conventionally trained fellows is equivalent). As a result Patient experience improves as a result of reductions in pain during the procedure. Finance estimates these improvements will result in 10 additional procedures per year as patients choose your health system Economists studying patient experience have valued a low-pain colonoscopy as worth $500 more to the average patient, although current reimbursement does not reflect this additional value

2% of colonoscopies will identify a polyp that will have to be surgically removed. All of these surgeries occur at the health system and profit per surgery averages $1,000

The hospital’s endoscopy suite is freestanding. Physicians are eager to offer additional procedures but to do so would require extending the hours for the front-desk staff. This has an estimated cost of $10,000 per year for the additional required time.

Annual rent on the current endoscopy suite is $300,000.

Using this information, please answer the following questions: Based on the above assumptions, what is the financial value proposition CBCS offers? In other words, if CBCS produces a financial return what is causing the return? This is a conceptual question. You don’t need to do any calculation at this point.

Create a model in Excel that quantifies the financial return on CBCS. Create your projections for 5 years.

3. Using an 8% discount rate, calculate the NPV of the CBCS project?

4. Using an 8% discount rate, calculate the IRR of the CBCS project?

5. Calculate the payback period of the CBCS project?

Answer 1

Ans 1.

The financial value proposition offered by CBCS

• Time saving and resultant increase in number of procedures- CBCS frees up time for faculty physicians overseeing fellows, which leads to an increase in the number of endoscopies and colonoscopies done by fellows and faculty.
• Improvement of patient experience due to reduction of pain results in additional procedures. Also, a low pain colonosopy fetches more returns tahn the ordinary ones.
• Increase in the number of surgeries - when more test pocedures are conducted, there are more chances which require surgery
• In short, the CBCS leads to an improvement in the procedures, thereby resulting in a gradual increase in the number of procedures and more goodwill.The quality of the whole process increases, which adds financia avlue by increasing the quantum of services, directly and indirectly.

Answer 2) Incremental Revenue and costs for the CBCS

Purchase price - colonoscopy simulator		-40000
Additional wages for front office		-10000
Revenue per colonoscopy	450
Less: Expenses for supplies	-200	250
Incremental revenue & Costs
Additional number of colonoscopies	number	Amount
Faculty	80
Fellows	10
Due to improved patient experience	10
	100	25000
Surgery- AddiTional caseS @ 2%	2
Profit per surgery	1000	2000
Incremental Revenue perAnnum		27000
Additional wages for front office per annum		-10000
Incremental Profits perAnnum		17000
Outflows/ Costs
Purchase price - colonoscopy simulator**		-40000
Assumptions:
** Purchase price is assumed to be 40000 because otherwise it will not be a meaningful result. If the cost is 4000$ only, then it can be recovered from 8 additional procedures

Answer 3)

Calculation of Net Present Value of the Project
Year	Cash flow	Discounting factor@ 8%
0	-40000	1	-40,000.00
1 to 5	17000	3.99	67,876.07
		NPV	27,876.07

Answer 4) Internal Rate of Return = IRR is the rate at which NPV becomes zero

By using interpolation method,

Working notes:

Calculation of Net Present Value of the Project
Year	Cash flow	Discounting factor@ 20%
0	-40000	1	-40,000.00
1 to 5	17000	2.99	50,840.41
		NPV	10,840.41

Calculation of Net Present Value of the Project
Year	Cash flow	Discounting factor@ 50%
0	-40000	1	-40,000.00
1 to 5	17000	1.74	29,522.63
		NPV	-10,477.37

IRR= 20%+ (50%-20%) * NPV of 20%

NPV of 20%-NPV of 50%

= 35.26%

5) Payback period if discounted at 8%

Calculation of Payback period
Year	Cash flow	Discounting factor@ 8%	Present value	Cumulative
0	-40000	1	-40,000.00
1	17000	0.93	15,740.74	15,740.74
2	17000	0.857339	14,574.76	30,315.50
3	17000	0.793832	13,495.15	43,810.65
4	17000	0.73503	12,495.51	56,306.16
5	17000	0.680583	11,569.91	67,876.07

In the third year, assuming even cash flows, the payback will be at 2 years and 9 months