Capital budgeting criteria: ethical considerations

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. The plant without mitigation would cost $210.55 million, and the expected cash inflows would be $70 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $75.77 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 19%.

1. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.
   NPV $   million
   IRR  %

   Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.
   NPV $   million
   IRR  %

2. How should the environmental effects be dealt with when evaluating this project?
   1. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.
   2. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.
   3. The environmental effects should be ignored since the plant is legal without mitigation.
   4. The environmental effects should be treated as a sunk cost and therefore ignored.
   5. If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in that analysis.
   
   -Select-IIIIIIIVVItem 5
3. Should this project be undertaken?
   1. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" that might result from undertaking the project without concern for the environmental impacts.
   2. The project should be undertaken only under the "mitigation" assumption.
   3. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.
   4. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions.
   5. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken.
   
   

12. All of the following are arguments used by proponents of offshoring except:

a. It creates enormous value for firms and economies.

b. Western firms are able to tap into low-cost and high-quality labor.

c. Firms can focus on their core capabilities.

d. For every dollar spent by US firms on India, the U.S. obtains $1.13.

e. It is not true that some US employees may lose their jobs.

14. Which are true regarding informal constraints?

a. When formal institutional constraints fail, informal constraints tend to fail as well.

b. Following the collapse the former Soviet Union, informal constraints were unable to facilitate growth of entrepreneurial firms.

c. Even in developed economies, the best-connected firms can reap significant benefits.

d. All of the above.

e. None of the above.

15. Which is the instrumental view regarding motivation to become ethical?

a. Jump on the “bandwagon” to appear more legitimate without becoming more ethical.

b. Be self-motivated to “do it right” regardless of social pressures.

c. Good ethics are a way to achieve good profits.

d. Ethics is an instrument to impose the values of the elite on the masses.

e. Ethics is a game that is played like a musical instrument.

17. Which of the following are NOT true in regards to small and medium-sized enterprises (SMEs).

a. They create approximately 50% of total value added in the world.

b. They generate 60-90% of employment, depending on where they are located.

c. Each year 4-6% of adult working population in North America, Western Europe, Central and Eastern Europe attempt to start a new venture.

d. Around the world, a majority of entrepreneurial firms (including 60% of start-ups in the US) succeed within 6 years.

18. To achieve success, entrepreneurial resources must be:

a. Of low value so as to reduce cost.

b. Common.

c. Non-core competencies that are hard to imitate.

d. Organizationally embedded.

e. All of the above.

19. Which of the following is NOT an example of one of the five entrepreneurial strategies?

a. Use speed and stealth to disrupt and pre-empt competitors.

b. Emphasize analysis over action.

c. Less novel, but substantially new ways of doing business can also be innovative.

d. Centrally located network positions are most helpful.

e. Selling an equity stake to outside investors.

20. “Greenfield ventures” are:

a. Examples of international grain corporations.

b. Environmentally friendly MNEs.

c. Wholly owned subsidiaries that are built from scratch in a foreign country.

d. Irrigation projects in areas stricken by famine.

e. Joint ventures in agriculture between governments and private firms.

Research the different nursing care facilities in your community. Discuss the pros and cons of the facility in terms of what they offer. Provide a brief report with the following questions:

• What is the basic rate for room, board, and services (it’s a good idea to get this information in writing)?
• What services are covered by this rate?
• Are there other services available and how much do they cost?
• What are the payment policies?
• What is the refund policy if someone leaves before the end of a month?
• What is the policy for rate increases?
• How long has the current administration been in place?
• Is there enough staff available to meet my needs?
• Is there frequent staff turnover?
• Is some level of nursing care provided (RN, LPN, Nursing
• Assistant)? How often is it available?
• Who will help me with medications if I need it (e.g. reminding me to take them, opening the bottle)?
• Can someone administer medications to me if I can’t take them myself (e.g. applying medication to my skin, putting a pill in my mouth)?
• Can someone help me if I need special care (e.g. caring for a wound)?
• What happens if I have an emergency? Can I get help right away?
• Are staffs suitably dressed, personable, and outgoing?
• Do the staff members treat residents with respect and dignity?
• Do staff members treat each other in a professional manner?
• What language does most of the staff speak?
• What type of help with personal care is available (e.g. bathing, dressing)?
• How flexible is the schedule for receiving help with personal care?
• What, if any, transportation services are available? (e.g. medical appointments, shopping, religious services).
• Will staff arrange for activities (e.g. hair appointment, concert)?
• How does the home support and accommodate personal hobbies?
• Are there regularly planned activities that I will enjoy?
• Will I be able to attend religious services of my choice?
• Can I bring my pet with me when I move?
• When can I have visitors?
• Are there shops, a library, a park, or other amenities within walking distance?
• Is the home close to activities I enjoy?
• Is the home on a bus line?
• Is there an outside area to sit, walk, or garden?
• Are there shops, a library, a park, or other amenities within walking distance?
• Is the home close to activities I enjoy?
• Is the home on a bus line?
• Is there an outside area to sit, walk, or garden?
• Is the floor plan easy to follow?
• Are doorways, hallways, and rooms accommodating to wheelchairs and walkers?
• Are there hand rails to help with walking and in the bathroom?
• Are cupboards and shelves easy to reach?
• Are there nonskid floors and firm carpets to assist walking?
• Does the home have good natural and artificial lighting?
• Is the home clean, free of odors, and well heated and cooled?
• Does the home meet my standards of cleanliness?
• Is the home free from obvious environmental hazards?
• Are the home’s rooms clean, safe, and adequate for my needs?
• Will I have free use of common areas, such as the kitchen, activity rooms, toilet facilities, dining room, or grounds?
• Can I smoke in my room or in common areas?
• What furniture is provided?
• Can I bring along some of my furniture or other personal items?
• Can I adjust the temperature of my room?
• Is there a sit-down shower?
• Can I have my own personal phone line or internet connection?
• Are emergency procedures clearly posted?
• Am I able to lock my room and/or are there locked areas in each room for personal valuables?
• Is the food pleasing, nutritious, adequate, and attractively served?
• What if I don’t like what is being served?
• Can I cook in my room?
• Are snacks available?
• Are there specific meal times or are they flexible?
• Is there a refrigerator available to store my personal food?
• Will the home meet my dietary or cultural food preferences?
• Can I request special foods?
• Do other residents socialize with each other and appear happy and comfortable?
• Do residents speak favorably of the facility?
• Do the residents look like people I want to live with?
• How are room changes and roommate concerns addressed?
• Is there a resident group that meets?
• Do any of the other residents have a history of violent or other problem behaviors? How are these situations handled by staff?

Research the different nursing care facilities in your community. Discuss the pros and cons of the facility in terms of what they offer. Provide a brief report with the following questions: • What is the basic rate for room, board, and services (it’s a good idea to get this information in writing)? • What services are covered by this rate? • Are there other services available and how much do they cost? • What are the payment policies? • What is the refund policy if someone leaves before the end of a month? • What is the policy for rate increases? • How long has the current administration been in place? • Is there enough staff available to meet my needs? • Is there frequent staff turnover? • Is some level of nursing care provided (RN, LPN, Nursing • Assistant)? How often is it available? • Who will help me with medications if I need it (e.g. reminding me to take them, opening the bottle)? • Can someone administer medications to me if I can’t take them myself (e.g. applying medication to my skin, putting a pill in my mouth)? • Can someone help me if I need special care (e.g. caring for a wound)? • What happens if I have an emergency? Can I get help right away? • Are staffs suitably dressed, personable, and outgoing? • Do the staff members treat residents with respect and dignity? • Do staff members treat each other in a professional manner? • What language does most of the staff speak? • What type of help with personal care is available (e.g. bathing, dressing)? • How flexible is the schedule for receiving help with personal care? • What, if any, transportation services are available? (e.g. medical appointments, shopping, religious services). • Will staff arrange for activities (e.g. hair appointment, concert)? • How does the home support and accommodate personal hobbies? • Are there regularly planned activities that I will enjoy? • Will I be able to attend religious services of my choice? • Can I bring my pet with me when I move? • When can I have visitors? • Are there shops, a library, a park, or other amenities within walking distance? • Is the home close to activities I enjoy? • Is the home on a bus line? • Is there an outside area to sit, walk, or garden? • Are there shops, a library, a park, or other amenities within walking distance? • Is the home close to activities I enjoy? • Is the home on a bus line? • Is there an outside area to sit, walk, or garden? • Is the floor plan easy to follow? • Are doorways, hallways, and rooms accommodating to wheelchairs and walkers? • Are there hand rails to help with walking and in the bathroom? • Are cupboards and shelves easy to reach? • Are there nonskid floors and firm carpets to assist walking? • Does the home have good natural and artificial lighting? • Is the home clean, free of odors, and well heated and cooled? • Does the home meet my standards of cleanliness? • Is the home free from obvious environmental hazards? • Are the home’s rooms clean, safe, and adequate for my needs? • Will I have free use of common areas, such as the kitchen, activity rooms, toilet facilities, dining room, or grounds? • Can I smoke in my room or in common areas? • What furniture is provided? • Can I bring along some of my furniture or other personal items? • Can I adjust the temperature of my room? • Is there a sit-down shower? • Can I have my own personal phone line or internet connection? • Are emergency procedures clearly posted? • Am I able to lock my room and/or are there locked areas in each room for personal valuables? • Is the food pleasing, nutritious, adequate, and attractively served? • What if I don’t like what is being served? • Can I cook in my room? • Are snacks available? • Are there specific meal times or are they flexible? • Is there a refrigerator available to store my personal food? • Will the home meet my dietary or cultural food preferences? • Can I request special foods? • Do other residents socialize with each other and appear happy and comfortable? • Do residents speak favorably of the facility? • Do the residents look like people I want to live with? • How are room changes and roommate concerns addressed? • Is there a resident group that meets? • Do any of the other residents have a history of violent or other problem behaviors? How are these situations handled by staff?

Research the different nursing care facilities in your community. Discuss the pros and cons of the facility in terms of what they offer. Provide a brief report with the following questions: • What is the basic rate for room, board, and services (it’s a good idea to get this information in writing)? • What services are covered by this rate? • Are there other services available and how much do they cost? • What are the payment policies? • What is the refund policy if someone leaves before the end of a month? • What is the policy for rate increases? • How long has the current administration been in place? • Is there enough staff available to meet my needs? • Is there frequent staff turnover? • Is some level of nursing care provided (RN, LPN, Nursing • Assistant)? How often is it available? • Who will help me with medications if I need it (e.g. reminding me to take them, opening the bottle)? • Can someone administer medications to me if I can’t take them myself (e.g. applying medication to my skin, putting a pill in my mouth)? • Can someone help me if I need special care (e.g. caring for a wound)? • What happens if I have an emergency? Can I get help right away? • Are staffs suitably dressed, personable, and outgoing? • Do the staff members treat residents with respect and dignity? • Do staff members treat each other in a professional manner? • What language does most of the staff speak? • What type of help with personal care is available (e.g. bathing, dressing)? • How flexible is the schedule for receiving help with personal care? • What, if any, transportation services are available? (e.g. medical appointments, shopping, religious services). • Will staff arrange for activities (e.g. hair appointment, concert)? • How does the home support and accommodate personal hobbies? • Are there regularly planned activities that I will enjoy? • Will I be able to attend religious services of my choice? • Can I bring my pet with me when I move? • When can I have visitors? • Are there shops, a library, a park, or other amenities within walking distance? • Is the home close to activities I enjoy? • Is the home on a bus line? • Is there an outside area to sit, walk, or garden? • Are there shops, a library, a park, or other amenities within walking distance? • Is the home close to activities I enjoy? • Is the home on a bus line? • Is there an outside area to sit, walk, or garden? • Is the floor plan easy to follow? • Are doorways, hallways, and rooms accommodating to wheelchairs and walkers? • Are there hand rails to help with walking and in the bathroom? • Are cupboards and shelves easy to reach? • Are there nonskid floors and firm carpets to assist walking? • Does the home have good natural and artificial lighting? • Is the home clean, free of odors, and well heated and cooled? • Does the home meet my standards of cleanliness? • Is the home free from obvious environmental hazards? • Are the home’s rooms clean, safe, and adequate for my needs? • Will I have free use of common areas, such as the kitchen, activity rooms, toilet facilities, dining room, or grounds? • Can I smoke in my room or in common areas? • What furniture is provided? • Can I bring along some of my furniture or other personal items? • Can I adjust the temperature of my room? • Is there a sit-down shower? • Can I have my own personal phone line or internet connection? • Are emergency procedures clearly posted? • Am I able to lock my room and/or are there locked areas in each room for personal valuables? • Is the food pleasing, nutritious, adequate, and attractively served? • What if I don’t like what is being served? • Can I cook in my room? • Are snacks available? • Are there specific meal times or are they flexible? • Is there a refrigerator available to store my personal food? • Will the home meet my dietary or cultural food preferences? • Can I request special foods? • Do other residents socialize with each other and appear happy and comfortable? • Do residents speak favorably of the facility? • Do the residents look like people I want to live with? • How are room changes and roommate concerns addressed? • Is there a resident group that meets? • Do any of the other residents have a history of violent or other problem behaviors? How are these situations handled by staff?

Research the different nursing care facilities in Miami, FL . Discuss the pros and cons of the facility you find in terms of what they offer. Provide a brief report with the following questions:

• What is the basic rate for room, board, and services (it’s a good idea to get this information in writing)?

• What services are covered by this rate?

• Are there other services available and how much do they cost?

• What are the payment policies?

• What is the refund policy if someone leaves before the end of a month?

• What is the policy for rate increases?

• How long has the current administration been in place?

• Is there enough staff available to meet my needs?

• Is there frequent staff turnover?

• Is some level of nursing care provided (RN, LPN, Nursing • Assistant)?

How often is it available?

• Who will help me with medications if I need it (e.g. reminding me to take them, opening the bottle)?

• Can someone administer medications to me if I can’t take them myself (e.g. applying medication to my skin, putting a pill in my mouth)?

• Can someone help me if I need special care (e.g. caring for a wound)?

• What happens if I have an emergency? Can I get help right away?

• Are staffs suitably dressed, personable, and outgoing?

• Do the staff members treat residents with respect and dignity?

• Do staff members treat each other in a professional manner?

• What language does most of the staff speak?

• What type of help with personal care is available (e.g. bathing, dressing)?

• How flexible is the schedule for receiving help with personal care?

• What, if any, transportation services are available? (e.g. medical appointments, shopping, religious services)

. • Will staff arrange for activities (e.g. hair appointment, concert)?

• How does the home support and accommodate personal hobbies?

• Are there regularly planned activities that I will enjoy?

• Will I be able to attend religious services of my choice?

• Can I bring my pet with me when I move?

• When can I have visitors?

• Are there shops, a library, a park, or other amenities within walking distance?

• Is the home close to activities I enjoy?

• Is the home on a bus line?

• Is there an outside area to sit, walk, or garden?

• Are there shops, a library, a park, or other amenities within walking distance?

• Is the home close to activities I enjoy?

• Is the home on a bus line?

• Is there an outside area to sit, walk, or garden?

• Is the floor plan easy to follow?

• Are doorways, hallways, and rooms accommodating to wheelchairs and walkers?

• Are there hand rails to help with walking and in the bathroom?

• Are cupboards and shelves easy to reach?

• Are there nonskid floors and firm carpets to assist walking?

• Does the home have good natural and artificial lighting?

• Is the home clean, free of odors, and well heated and cooled?

• Does the home meet my standards of cleanliness?

• Is the home free from obvious environmental hazards?

• Are the home’s rooms clean, safe, and adequate for my needs?

• Will I have free use of common areas, such as the kitchen, activity rooms, toilet facilities, dining room, or grounds?

• Can I smoke in my room or in common areas?

• What furniture is provided?

• Can I bring along some of my furniture or other personal items?

• Can I adjust the temperature of my room?

• Is there a sit-down shower?

• Can I have my own personal phone line or internet connection?

• Are emergency procedures clearly posted?

• Am I able to lock my room and/or are there locked areas in each room for personal valuables?

• Is the food pleasing, nutritious, adequate, and attractively served?

• What if I don’t like what is being served?

• Can I cook in my room?

• Are snacks available?

• Are there specific meal times or are they flexible?

• Is there a refrigerator available to store my personal food?

• Will the home meet my dietary or cultural food preferences?

• Can I request special foods?

• Do other residents socialize with each other and appear happy and comfortable?

• Do residents speak favorably of the facility?

• Do the residents look like people I want to live with?

• How are room changes and roommate concerns addressed?

• Is there a resident group that meets?

• Do any of the other residents have a history of violent or other problem behaviors? How are these situations handled by staff?

Research the different nursing care facilities in your community. Discuss the pros and cons of the facility in terms of what they offer. Provide a brief report with the following questions:

• What is the basic rate for room, board, and services (it’s a good idea to get this information in writing)?
• What services are covered by this rate?
• Are there other services available and how much do they cost?
• What are the payment policies?
• What is the refund policy if someone leaves before the end of a month?
• What is the policy for rate increases?
• How long has the current administration been in place?
• Is there enough staff available to meet my needs?
• Is there frequent staff turnover?
• Is some level of nursing care provided (RN, LPN, Nursing
• Assistant)? How often is it available?
• Who will help me with medications if I need it (e.g. reminding me to take them, opening the bottle)?
• Can someone administer medications to me if I can’t take them myself (e.g. applying medication to my skin, putting a pill in my mouth)?
• Can someone help me if I need special care (e.g. caring for a wound)?
• What happens if I have an emergency? Can I get help right away?
• Are staffs suitably dressed, personable, and outgoing?
• Do the staff members treat residents with respect and dignity?
• Do staff members treat each other in a professional manner?
• What language does most of the staff speak?
• What type of help with personal care is available (e.g. bathing, dressing)?
• How flexible is the schedule for receiving help with personal care?
• What, if any, transportation services are available? (e.g. medical appointments, shopping, religious services).
• Will staff arrange for activities (e.g. hair appointment, concert)?
• How does the home support and accommodate personal hobbies?
• Are there regularly planned activities that I will enjoy?
• Will I be able to attend religious services of my choice?
• Can I bring my pet with me when I move?
• When can I have visitors?
• Are there shops, a library, a park, or other amenities within walking distance?
• Is the home close to activities I enjoy?
• Is the home on a bus line?
• Is there an outside area to sit, walk, or garden?
• Are there shops, a library, a park, or other amenities within walking distance?
• Is the home close to activities I enjoy?
• Is the home on a bus line?
• Is there an outside area to sit, walk, or garden?
• Is the floor plan easy to follow?
• Are doorways, hallways, and rooms accommodating to wheelchairs and walkers?
• Are there hand rails to help with walking and in the bathroom?
• Are cupboards and shelves easy to reach?
• Are there nonskid floors and firm carpets to assist walking?
• Does the home have good natural and artificial lighting?
• Is the home clean, free of odors, and well heated and cooled?
• Does the home meet my standards of cleanliness?
• Is the home free from obvious environmental hazards?
• Are the home’s rooms clean, safe, and adequate for my needs?
• Will I have free use of common areas, such as the kitchen, activity rooms, toilet facilities, dining room, or grounds?
• Can I smoke in my room or in common areas?
• What furniture is provided?
• Can I bring along some of my furniture or other personal items?
• Can I adjust the temperature of my room?
• Is there a sit-down shower?
• Can I have my own personal phone line or internet connection?
• Are emergency procedures clearly posted?
• Am I able to lock my room and/or are there locked areas in each room for personal valuables?
• Is the food pleasing, nutritious, adequate, and attractively served?
• What if I don’t like what is being served?
• Can I cook in my room?
• Are snacks available?
• Are there specific meal times or are they flexible?
• Is there a refrigerator available to store my personal food?
• Will the home meet my dietary or cultural food preferences?
• Can I request special foods?
• Do other residents socialize with each other and appear happy and comfortable?
• Do residents speak favorably of the facility?
• Do the residents look like people I want to live with?
• How are room changes and roommate concerns addressed?
• Is there a resident group that meets?
• Do any of the other residents have a history of violent or other problem behaviors? How are these situations handled by staff?

Twin Falls Community Hospital is a 250-bed, not-for-profit hospital located

in the city of Twin Falls, the largest city in Idaho’s Magic Valley region

and the seventh largest in the state. The hospital was founded in 1972 and

today is acknowledged to be one of the leading healthcare providers in the

area.

Twin Falls’ management is currently evaluating a proposed ambulatory

(outpatient) surgery center. Over 80 percent of all outpatient surgery is

performed by specialists in gastroenterology, gynecology, ophthalmology,

otolaryngology, orthopedics, plastic surgery, and urology. Ambulatory surgery

requires an average of about one and one-half hours; minor procedures take

about one hour or less, and major procedures take about two or more hours.

About 60 percent of the procedures are performed under general anesthesia, 30

percent under local anesthesia, and 10 percent under regional or spinal

anesthesia. In general, operating rooms are built in pairs so that a patient

can be prepped in one room while the surgeon is completing a procedure in the

other room.

The outpatient surgery market has experienced significant growth since the

first ambulatory surgery center opened in 1970. This growth has been fueled

by three factors. First, rapid advancements in technology have enabled many

procedures that were historically performed in inpatient surgical suites to

be switched to outpatient settings. This shift was caused mainly by advances

in laser, laparoscopic, endoscopic, and arthroscopic technologies. Second,

Medicare has been aggressive in approving new minimally invasive surgery

techniques, so the number of Medicare patients utilizing outpatient surgery

services has grown substantially. Finally, patients prefer outpatient

surgeries because they are more convenient, and third-party payers prefer

them because they are less costly.

These factors have led to a situation in which the number of inpatient

surgeries has grown little (if at all) in recent years while the number of

outpatient procedures has been growing at over 10 percent annually and now

totals about 22 million a year. Rapid growth in the number of outpatient

surgeries has been accompanied by a corresponding growth in the number of

outpatient surgical facilities. The number currently stands at about 5,000

nationwide, so competition in many areas has become intense. Somewhat

surprisingly, there is no outpatient surgery center in the Twin Falls area,

although there have been rumors that local physicians are exploring the

feasibility of a physician-owned facility.

The hospital currently owns a parcel of land that is a perfect location for

the surgery center. The land was purchased five years ago for $350,000, and

last year the hospital spent (and expensed for tax purposes) $25,000 to clear

the land and put in sewer and utility lines. If sold in today’s market, the

land would bring in $500,000, net of realtor commissions and fees. Land

prices have been extremely volatile, so the hospital’s standard procedure is

to assume a salvage value equal to the current value of the land.

The surgery center building, which will house four operating suites, would

cost $5 million and the equipment would cost an additional $5 million, for a

total of $10 million. The project will probably have a long life, but the

hospital typically assumes a five-year life in its capital budgeting analyses

and then approximates the value of the cash flows beyond Year 5 by including

a terminal, or salvage, value in the analysis. To estimate the terminal

value, the hospital typically uses the market value of the building and

equipment after five years, which for this project is estimated to be $5

million, excluding the land value.

The expected volume at the surgery center is 20 procedures a day. The average

charge per procedure is expected to be $1,500, but charity care, bad debts,

insurer discounts (including Medicare and Medicaid), and other allowances

lower the net revenue amount to $1,000. The center would be open five days a

week, 50 weeks a year, for a total of 250 days a year. Labor costs to run the

surgery center are estimated at $800,000 per year, including fringe benefits.

Supplies costs, on average, would run $400 per procedure, including

anesthetics. Utilities, including hazardous waste disposal, would add another

$50,000 in annual costs. If the surgery center were built, the hospital’s

cash overhead costs would increase by $36,000 annually, primarily for

housekeeping and buildings and grounds maintenance.

One of the most difficult factors to deal with in project analysis is

inflation. Both input costs and charges in the healthcare industry have been

rising at about twice the rate of overall inflation. Furthermore,

inflationary pressures have been highly variable. Because of the difficulties

involved in forecasting inflation rates, the hospital begins each analysis by

assuming that both revenues and costs, except for depreciation, will increase

at a constant rate. Under current conditions, this rate is assumed to be 3

percent. The hospital’s corporate cost of capital is 10 percent.

When the project was mentioned briefly at the last meeting of the hospital’s

board of directors, several questions were raised. In particular, one

director wanted to make sure that a risk analysis was performed prior to

presenting the proposal to the board. Recently, the board was forced to close

a day care center that appeared to be profitable when analyzed but turned out

to be a big money loser. They do not want a repeat of that occurrence.

Another director stated that she thought the hospital was putting too much

faith in the numbers: “After all,” she pointed out, “that is what got us into

trouble on the day care center. We need to start worrying more about how

projects fit into our strategic vision and how they impact the services that

we currently offer.” Another director, who also is the hospital’s chief of

medicine, expressed concern over the impact of the ambulatory surgery center

on the current volume of inpatient surgeries

To develop the data needed for the risk (scenario) analysis, Jules Bergman,

the hospital’s director of capital budgeting, met with department heads of

surgery, marketing, and facilities. After several sessions, they concluded

that only two input variables are highly uncertain: number of procedures per

day and building/equipment salvage value. If another entity entered the local

ambulatory surgery market, the number of procedures could be as low as 15 per

day. Conversely, if acceptance is strong and no competing centers are built,

the number of procedures could be as high as 25 per day, compared to the most

likely value of 20 per day. If real estate and medical equipment values stay

strong, the building/equipment salvage value could be as high as $7 million,

but if the market weakens, the salvage value could be as low as $3 million,

compared to an expected value of $5 million. Jules also discussed the

probabilities of the various scenarios with the medical and marketing staffs,

and after a great deal of discussion reached a consensus of 70 percent for

the most likely case and 15 percent each for the best and worst cases.

Assume that the hospital has hired you as a financial consultant. Your task

is to conduct a complete project analysis on the ambulatory surgery center

and to present your findings and recommendations to the hospital’s board of

directors. To get you started, Table 1 contains the cash flow analysis for

the first three years.

Table 1

Partial Cash Flow Analysis

0 1 2 3

Land opportunity cost ($500,000)

Building/equipment cost (10,000,000)

Net revenues $5,000,000 $5,150,000 $5,304,500

Less: Labor costs 800,000 824,000 848,720

Utilities costs 50,000 51,500 53,045

Supplies 2,000,000 2,060,000 2,121,800

Incremental overhead 36,000 37,080 38,192

Net income $2,114,000 $2,177,420 $2,242,743

Plus: Net land salvage value

Plus: Net building/equipment salvage value

Net cash flow ($10,500,000) $2,114,000 $2,177,420 $2,242,743

5. Conduct a scenario analysis. What is its expected NPV? What is the worst and

best case NPVs? How does the worst case value help in assessing the

hospital’s ability to bear the risk of this investment?

1) If a price that a perfectly competitive firm is able to get is above its average variable cost but below its average total cost then

a. The firm will suffer economic losses and should shut down immediately

b. The firm will be able to earn economic profit as soon as it can increase the size of its factory

c. The firm will suffer economic losses but should continue to operate

d. None of the above

2) In the short run, if price falls, the firm will respond by

a. Shutting down regardless of how high its variable costs are

b. Equating average variable cost to marginal revenue

c. Reducing along its marginal cost curve as long as marginal revenue exceeds average variable cost

d. None of the above

3) Suppose a competitive firm is in equilibrium then the price of one of its inputs falls. What will happen?

a. The firm will hire more of the lower priced input

b. The firm will produce more output

c.The firm cost curves will downward

d. All of the above

4. A competitive industry will be in a long run equilibrium when

a. Each firm in the industry is earning zero economic profit

b. No entry or exit occurs

c.The total quantity produced at the prevailing price equals the total quantity consumers want to purchase

d. All of the above

5. In an increasing cost competitive industry, if prices rises above its long run equilibrium level which of the following will occur as the industry adjusts to a new long equilibrium ?

a. Firms will exit the industry

b. Economic profits will exits

c. Input prices will rise only when firms leave the industry

d. Price will return to its original level

6.The marginal revenue curve of a monopolist lies below the demand curve ( in the absence of price discrimination) becaus

a. The demand curve is unit elastic

b. The monopolist must lower price on all units sold in order to sell additional units

c. The monopolist is a price taker

d. The marginal revenue curve coincides with the average revenue curve

7. The demand curve for a monopolist's slopes downward because

a. Profit per unit declines

b. Demand elasticity is greater than one in the portion of the demand curve where the monopolist operates

c.It price discriminates

d. It faces the market demand curve

8. If a monopolist's is operating in the elastic portion of its demand curve then

a. An increase in price will increase total revenue

b. An increase in price will decrease total revenue

c. Marginal revenue is negative

d. An increase in price will leave total revenue unchanged

9. Marginal revenue is negative when

a. The demand curve is downward sloping

b. Demand curve is elastic

c. Demand curve is inelastic

d. Demand is unit elastic

10. The lerner index

a. Measures the monopoly power as the markup of price over average cost

b. Measures the monopoly power as the markup of price over marginal cost

c. Measures the market share of a firm

d. Measures the market capitalization of a firm

11. Compared to a competitive industry, ceteris paribus a standard monopoly firm

a. Sells more units and charges a higher price

b. Sells the same amount of units but at a higher price

c. Does not try to maximize profits as do firms in competitive industry

d. Restricts output and charges a higher price

12. A monopoly will produce the efficient rate of output if it

a. Engages in perfect price discrimination

b. Engages in no price discrimination

c. Engages in third degree price discrimination

d. Is regulates and average cost pricing is enforced

13. Which of the following types of mergers directly reduces the number of competitors in an industry?

a. Congolomerate

b. Horizontal

c. Vertical

d. Bivariate

14. Why do gas stations near airport often charge more for gasoline ?

a. They have higher costs

b. They are inconvenient

c. They face a smaller elasticity of demand

d. They must pay the airport agency for space

15. The deadweight loss due to monopoly restriction of output occurs over units of output

a. For which the willingness to pay would be greater than MC but don't get produces

b. For which the willingness to pay is greater than MC and do not get produced

c. Up until the profit maximizing level of output

d. For which the willingness to pay is less than MC but don't get produced

16. First degree discrimination

a. Is perfect because consumers benefit the most

b. Is called first degree because it does not apply to resale of products

c. Is also known as perfect price discrimination

d. Is the easiest form of price discrimination