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1.
Identify as well as you can the three iron triangle constraints for this project: cost, time, and scope.
Cost: $11 million;
Time: start after Nov 20X6, finish by July 20X7;
Scope: construct a project plan, purchase land, purchase furnishings, purchase materials and contract labor
to construct building and connection, and train staff in the new facility services.
2. Identify the expected benefits of this project for Friendly Medical Center.





A profit program for the Center but under their control that would gain net cash flow of $1.5
million/year;
Improve the local image of Friendly Medical Center;
Gain additional referrals to the Center’s outpatient therapy programs;
Increase the census in the hospital’s inpatient units, and
Provide better care for the community in terms of reimbursable preventive and wellness programs.
3. Comment on the strategic initiatives resulting from the Board’s major strategic planning retreat. Would
you consider this a productive retreat?
The outcomes of the retreat were rather shallow. Better would have been to have come up with these two
initiatives at a special board meeting and then collect data to decide at the retreat what areas to focus on for
improving the cost effectiveness of patient care delivery and what alternatives to explore in more detail for
new programs and services that would capitalize on their excellent staff and reputation.
4. What “project selection” procedure was used here? How common do you think this is? How wise do you
think it is?
This was basically a “sacred cow” approach by the CEO, probably not that uncommon. Although the idea
sounds like it could be a success, we don’t see any risk analysis being considered, or the consideration of
other alternatives that might have been even more promising.
1. ( 2.5pts) Using the cash flow on Page 15 in your text generate an Excel sheet using your assigned k
values
K (%)
NPV ($)
6
141557
7
119,604
8
99296
9
80494
10
63072
11
46916
12
31,932
13
17997
14
5054
15
-6985
16
-18189
17
-28624
18
-38349
19
-47417
20
-55877
21
-63775
2.
Plot of NPV Versus Interest rate
NPV ($)
180000
120000
60000
0
0
6
11
17
22
28
-60000
-120000
2. (2.5pts)Do Exercise 1 on page 28 in the text.
A Four year financial forcast to have a net cash inflow of $20,000, $25,000, $30,000, and
$50,000 in the next four years. It will cost $75,000 to implement the project, payable at the
beginning of the project. If the required rate of return is 20% conduct a discounted cash flow
$50K
calculation to determine the NPV.
$30K
$20K
$25K
NPV = -$75K + $20K(P/F, 20%,1) + $25K(P/F, 20%,2) + $30K(P/F, 20,3) + $50K(P/F, 20, 4)
NPV = -$75K + $20K(0.8333) + $25K(0.6944) + $30K(0.5787) +$50K(0.4823)
NPV = -$75K + $ 16.666 + $ 17.36 + $ 17.361 + $ 24.115 = $ 0.496K = $496
In order to answer this question, the student needs to discount the cash flows in years 1 through 4
($20,000, $25,000, $30,000 and $50,000 respectively) to the present using a 30% discount rate
and compare this value with the initial outflow of $75,000. Using the NPV Excel formula gives the
following analysis:
4.(5pts) A company which uses austenitic nickel chromium ions to manufacture resistance heating wire
is considering a new annealing drawing process to reduce cost. If the new process will cost $1.75
million dollars now, how much must be saved each year to cover the investment in ten years at an
interest rate of 12%?
A = $1.75M(A/P, 12%,10)= $1.75M(0.12((1.12)10)/((1.12)10 -1)
= $1.75M(0.12(3.105)/( 3.10584 -1) = $1.75M(0.37270/2.10584)
= $1.75M(0.176985)= $309723.75
5. (5pts) A construction company invests $55,000 in a new bulldozer. If income from temporary leasing of
the bulldozer is expected to be $11,000 per year, when will it take to recover the investment at an
interest rate of 15% ?
P = A [(1 +i)n -1]/i(1 +i)n
$55,00 = $11,000[1.15)n -1]/ 0.15(1.15)n
(5.0)(0.15) = 1 – 1/1.15n
0.75 = 1 – 1/1.15n
0.25 = 1/1.15n
1.15n = 1/0.25 = 4.0
Nlog 1.15
= log 4.0
N = log4.0/log 1.15 = 9.918 years

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