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JONES MEMORIAL HOSPITAL

Competing Technologies

1 Explain the term backfill.

2 Consider the base case situation for the first system to be acquired.

a. What are the NPVs and IRRs of the two alternative technologies? What factor drives the financial

superiority of the more profitable technology?

b. What is the incremental NPV of solid state versus water perfusion technology? What does the

incremental NPV tell us?

3. Solid-state technology allows for expanded volume. Assess the sensitivity of the decision to the number of additional tests performed. To do this, assume that the number of additional tests could be as low as 50 or as high as 150. Also, what would be the result if there were no additional tests?

4. Consider the backfill assumption. Assess the sensitivity of the decision to the number of additional bed days. What if the number of additional bed days were as low as 80 or as high as 175? What if no

additional bed days resulted from the backfill opportunity? What is the breakeven number of bed days (that is, the number at which the hospital is indifferent between the two technologies)?

5. Do the two systems have the same financial risk? (Put another way, are the cash flows being discounted equally risky?) If not, why not? Modify your analysis to incorporate differential risk if you

believe that it exists.

CASE 19 JONES MEMORIAL HOSPITAL COMENTARIO The Mb Guide 122 Career pertama Se "Backsip Backfill , Spacel buds aquim , wym Edith Clinically duge us pl 2. TAAREET Make . PAX. Dagen und 174 re LEV PA Vph *Selskih * - Belinde hech 000 A Slayer se ) 125 Case 19: Jones Memorial Hospital of tests (more than 200) that might result from pent-up demand if solid-state technology is used. Volume might increase by 100 tests (to 300) or by as few as 50 or as many as 150. Third, is very difficult to estimate how many of the bed-days that are freed up because of the use of solid-state technology would actually be filled by medical/surgical patients. Again, without good data, she suggests you assume that 100 additional medical/surgical bed- days would result, but this number could be as low as 80 or as high as 175. Fourth, standard practice calls for all capital budgeting analyses to assume a 3 percent inflation rate in both costs and reimbursements. Finally, Jones's 344 corporate cost of capital is 10 percent, and it adds or subtracts 3 percentage inflation points to account for differential risk. ate Just as you were about to start the analysis, the phone rang, it was Belinda. in both She said it was likely that she could put her hands on some additional Custst funding to buy a second system, but the amount would only be enough to reimbutmens buy water perfusion system. When you asked Edith what the lab would do with the second system-if it, too, should be replaced-she said Jones could sell it for about $10,000 because it was only three years old. Edith added, "You might as well crunch the numbers on the potential second system while you're at it." or CCCE0% and it adds subtract 3% points to account for differential risk. CASE 19 JONES MEMORIAL HOSPITAL COMENTARIO The Mb Guide 122 Career pertama Se "Backsip Backfill , Spacel buds aquim , wym Edith Clinically duge us pl 2. TAAREET Make . PAX. Dagen und 174 re LEV PA Vph *Selskih * - Belinde hech 000 A Slayer se ) 125 Case 19: Jones Memorial Hospital of tests (more than 200) that might result from pent-up demand if solid-state technology is used. Volume might increase by 100 tests (to 300) or by as few as 50 or as many as 150. Third, is very difficult to estimate how many of the bed-days that are freed up because of the use of solid-state technology would actually be filled by medical/surgical patients. Again, without good data, she suggests you assume that 100 additional medical/surgical bed- days would result, but this number could be as low as 80 or as high as 175. Fourth, standard practice calls for all capital budgeting analyses to assume a 3 percent inflation rate in both costs and reimbursements. Finally, Jones's 344 corporate cost of capital is 10 percent, and it adds or subtracts 3 percentage inflation points to account for differential risk. ate Just as you were about to start the analysis, the phone rang, it was Belinda. in both She said it was likely that she could put her hands on some additional Custst funding to buy a second system, but the amount would only be enough to reimbutmens buy water perfusion system. When you asked Edith what the lab would do with the second system-if it, too, should be replaced-she said Jones could sell it for about $10,000 because it was only three years old. Edith added, "You might as well crunch the numbers on the potential second system while you're at it." or CCCE0% and it adds subtract 3% points to account for differential risk

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