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What is the expected rate of return on the project

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1. Consider the following balance sheet:

611_Balance sheet problem.png


a. How does this balance sheet differ from the one presented in your textbook Table 4.1 for Sunnyvale?
b. What is Best Care's net working capital for 2007?
c. What is Best Care's debt ratio? How does it compare with Sunnyvale's debt ratio?

2. You are considering starting a walk-in-clinic. Your financial projections for the first year of operations are as follows:

745_Balance sheet problem1.png

Assume that all costs are fixed, except supply costs, which are variable. Furthermore, assume that the clinic must pay taxes at a 30% rate.
a. Construct the clinic's projected P&L statement.
b. What number of visits is required to break even?
c. What number of visits is required to provide you with an after-tax profit of $100,000?

3. Assume that a primary care physician practice performs only physical examinations. However, there are three levels of examinations I, II, III - that vary in depth and complexity.

An RVU analysis indicates that a Level I examination requires 10 RVUs , a Level II exam 20 RVUs, and a Level III exam 30 RVUs. The total costs to run the practice, including a diagnostic laboratory, amount to $500,000 annually, and the numbers of examinations administered annually are 2,400 Level I, 800 Level II, and 400 Level III.

a. Using the RVU methodology, what is the estimated cost per type of examination?
b. If the goal of the practice is to earn a 20% profit margin on each examination, how should the examinations be priced?

4. Consider the following 2007 data for Newark General Hospital (in millions of dollars):

441_Balance sheet problem2.png

a. Calculate and interpret the profit variance.
b. Calculate and interpret the revenue variance.
c. Calculate and interpret the cost variance.
d. Calculate and interpret the volume and price variances on the revenue side.
e. Calculate and interpret the volume and management variances on the cost side.
f. How are the variances calculated above related?

5. Consider the following probability distribution of returns estimated for a proposed project that involves a new ultrasound machine:

43_Balance sheet problem3.png

a. What is the expected rate of return on the project?
b. What is the project's standard deviation of returns?
c. What is the project's coefficient of variation (CV) of returns?
d. What type of risk does the standard deviation and CV measure?
e. In what situation is the risk relevant?

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