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Discussion Scenario

In this discussion, you will assume the role of Business Operations Manager at Ashley Regional Medical

Center, which is evaluating the potential adoption of Isansys Wireless Monitoring systems in their

newborn intensive care unit (Birmingham Children's Hospital, n.d.). North Dakota’s Ashley Regional

believes that this technology will be both attractive to customers, and in line with their “Higher

Standards of Care Every Day” marketing and branding campaign (Ashley Regional Medical Center, n.d.).

Importantly, a variety of estimates are dependent on forecasting values. As Business Operations

Manager at Ashley Regional Medical Center, you thus believe that a thorough assessment of risk must

be made prior to the adoption of this costly system, which is a continuous monitoring and digitization

platform based on a “smart-patch” cardiac sensor and other wireless sensors, and a multifunction

patient portal located near each patient. As patient outcomes are improved, Ashley Regional believes

that cost may fall dramatically over time (Hoagland, 2011), for this small business. This assumption

depends on both cost and revenue assumptions, however, which you understand may be somewhat

optimistic given the presence of a newly-built competitor not to many miles away.

In investigating adoption of this technology as Business Operations Manager at Ashley Regional Medical

Center, you have estimated the project’s NPV to be positive at a discount rate of 18%, based on

projected cash flows. However, you recognize the possibility of error in these cash flow projections, and

you wish to alert decision-makers as to the impact of different assumptions about the future, on these

estimates. You intend to present these findings to the Medical Center’s Technology Adoption Board, a

group of medical professionals that is most likely unfamiliar with this variety of analysis. As such, while

you intend to include a discussion of sensitivity and scenario analyses alongside your estimates, you

understand that you will have to put some attention into introducing sensitivity and scenario analysis

prior to delivering this judgment. Working capital needs will begin at $20,000, and will be 10% of

revenues thereafter, while an initial investment of $800,000 (the price of the Isansys unit) will be

required. You have developed the following base estimate of essential data, and will assume that the

Isansys system will be depreciated on a MACRS 7-year basis:

Base Case

Unit Sales $7,200

Price per Unit 1,800

Variable costs per unit 1,200

Fixed costs per year $400,000

Table 1. Base Case

In the base case given, using a discount rate of 28%, a discounted cash flow would appear as follows:

Year 0 Year 1 Year 2 Year 3

Sales - $12,960,000 $16,848,000 $9,072,000

Variable - 8,640,000 11,232,000 6,048,000

Fixed - 400,000 400,000 400,000

Depreciation - $114,320 $195,920 $489,760

EBIT - 3,805,680.000 5,020,080.000 2,134,240.000

Taxes (34%) - 1,293,931.200 1,706,827.200 725,641.600

Net Income - 2,511,748.800 3,313,252.800 1,408,598.400

1.28 - 1.28 1.64 2.10

NPV - 1,962,304 2,022,249 671,672

Table 2. Calculation of NPV of EBIT, for use in computing Operating Cash Flow, Base Case

I. Operating Cash Flow

Operating Cash Flow Year 0 Year 1 Year 2 Year 3

EBIT - $3,805,680.00 $5,020,080.00 $2,134,240.00

Deprec - 57,160 57,161 57,162

Taxes - 1,293,931 1,706,827 725,642

Operating Cash Flow - 2,568,909 3,370,414 1,465,760

1.28 - 1.28 1.64 2.10

Base Case NPV - $2,006,960.00 $2,057,137.33 $698,929.02

II. Working Capital

Initial NWC (20,000) - - -

Change in NWC - 1,296,000 1,684,800 907,200

NWC Recovery - - - 757,600

Total Change in NWC (20,000) (1,276,000) (388,800) 777,600

III. Capital Spending

Initial Outlay (800,000) - - -

Aftertax Salvage - - - 349,840

Total Capital Spending

(800,000) - - 349,840

Table 3. Components of Operating Cash Flow, Base Case

Year 0 Year 1 Year 2 Year 3

Operating Cash Flow - 2,006,960 2,057,137 698,929

Changes in NWC (20,000) (1,276,000) (388,800) 777,600

Capital Spending (800,000) 0 0 349,840

Total Project Cash Flow

(820,000) 730,960 1,668,337 1,826,369

Cumulative Cash Flow

(820,000) (89,040) 1,579,297 3,405,666

1.28% 1.00 1.28 1.64 2.10

Discounted Cash Flow (820,000) (69,562) 963,926 1,623,948

Table 4. Discounted Cash Flow, Base Case