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NCU Medical Group (NCU MG) is a profitable and very busy multi-specialty group practice. As a part...

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Finance

NCU Medical Group (NCUMG) is a profitable and very busy multi-specialty group practice.As a part of its growth strategy, NCU MG is considering purchasingone of three medical practices in the community. Each of thepractices provides a unique strategic advantage that is alignedwith NCU MG’s long-term plans.

Senior Clinic islocated in a community offering extensive and very popular servicesfor older patients. Junior Clinic serves a growing but youngerpopulation with the largest population of children in the area.Sports Clinic provides sports medicine services and is thepreferred provider for the local all-state high school teams aswell as the local college sports programs.

As the vice presidentof operations for NCU MG, you’ve been asked to lead this effort andrecommend a decision to the board. Although all three practices arevery attractive and have expressed an interest in being acquired,the board will only choose one. The others may be considered at alater date.

You’ve collected thefollowing data related to acquisition costs, cash inflows, andoverhead expenses for the next 5 years. The cost of capital isdetermined to be 11%:

  • Senior Clinic will cost $20M to acquire. Additionally, thereare several roofing and facility maintenance needs that will cost$200,000 in Year 1, and $150,000 in Year 2. Finally, lab serviceswill cost $100,000 per year beginning in Year 1. Expected cashinflows from Senior Clinic are $4.5M, $8.5M, $10.265M, $11M, and$500K for Years 1 to 5.
  • Pediatric Clinic will cost $19M to acquire. The practice isonly two years old, and the facilities are in excellent condition.However, the clinic will have debt payments of $130,000 in Years 4and 5. Finally, Pediatric Clinic has a lab outreach program thatgenerates $20,000 in revenue every year beginning in Year 1. Halfof this revenue will flow to NCU MG. In addition to the labrevenue, expected cash inflows from Pediatric Clinic are $6M,$6.5M, $7M, $7.5M, and $8M for Years 1 to 5.
  • Sports Clinic will cost $21M to acquire. The clinic is in astate-of-the-art facility with owned and leased equipment. Annuallease payments are $90,000 per year and maintenance agreement costsare $50,000 per year, both beginning in Year 1. Finally, the clinicreceives $75,000 per year from the local college for medicalcoverage beginning in Year 1, all of which will flow to NCU MG. Inaddition to the college revenue, expected inflows from SportsClinic are $9M, 7.5M, $8.5M, $6M, and $3.25M for Years 1 to 5.

In addition to theabove information, you’ve determined that for the selected clinic,the NPV probabilities are:

  • 20% for the worst-case scenario
  • 60% for the most-likely scenario
  • 20% for the best-case scenario

Finally, the boardwould like your recommendation on other financing options. Ignoringthe previous 11% cost of capital, you’ve discovered that:

  • equity financing costs 15%
  • 20% debt financing costs 10% (after tax) with equity costing16%
  • 45% debt financing costs 11% (after-tax) with equity costing17%

As VP-Operations forNCU MG, assess each clinic option. In your assessment, developtables showing the NPV and IRR for each option. After selecting aclinic to recommend, determine its expected NPV and make afinancing (equity and/or debt) recommendation to the board.

Answer & Explanation Solved by verified expert
4.3 Ratings (680 Votes)
Selection of the Most Suitable Project of the 3 Options Given the above information we find the NPV and IRR for each of the alternatives using a cost of capital of 11 and over a time period of 5 years A Senior Clinic Particulars all figures in 000 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 1 Acquisition Costs Outflow 2000000 2 Roofing and Facility Maintenance Outflow 20000 15000 3 Lab Services Outflow 10000 10000 10000 10000 10000 4 Expected Cash Inflows 450000 850000 1026500 1100000 50000 Net Cash Flow 2000000    See Answer
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Transcribed Image Text

NCU Medical Group (NCUMG) is a profitable and very busy multi-specialty group practice.As a part of its growth strategy, NCU MG is considering purchasingone of three medical practices in the community. Each of thepractices provides a unique strategic advantage that is alignedwith NCU MG’s long-term plans.Senior Clinic islocated in a community offering extensive and very popular servicesfor older patients. Junior Clinic serves a growing but youngerpopulation with the largest population of children in the area.Sports Clinic provides sports medicine services and is thepreferred provider for the local all-state high school teams aswell as the local college sports programs.As the vice presidentof operations for NCU MG, you’ve been asked to lead this effort andrecommend a decision to the board. Although all three practices arevery attractive and have expressed an interest in being acquired,the board will only choose one. The others may be considered at alater date.You’ve collected thefollowing data related to acquisition costs, cash inflows, andoverhead expenses for the next 5 years. The cost of capital isdetermined to be 11%:Senior Clinic will cost $20M to acquire. Additionally, thereare several roofing and facility maintenance needs that will cost$200,000 in Year 1, and $150,000 in Year 2. Finally, lab serviceswill cost $100,000 per year beginning in Year 1. Expected cashinflows from Senior Clinic are $4.5M, $8.5M, $10.265M, $11M, and$500K for Years 1 to 5.Pediatric Clinic will cost $19M to acquire. The practice isonly two years old, and the facilities are in excellent condition.However, the clinic will have debt payments of $130,000 in Years 4and 5. Finally, Pediatric Clinic has a lab outreach program thatgenerates $20,000 in revenue every year beginning in Year 1. Halfof this revenue will flow to NCU MG. In addition to the labrevenue, expected cash inflows from Pediatric Clinic are $6M,$6.5M, $7M, $7.5M, and $8M for Years 1 to 5.Sports Clinic will cost $21M to acquire. The clinic is in astate-of-the-art facility with owned and leased equipment. Annuallease payments are $90,000 per year and maintenance agreement costsare $50,000 per year, both beginning in Year 1. Finally, the clinicreceives $75,000 per year from the local college for medicalcoverage beginning in Year 1, all of which will flow to NCU MG. Inaddition to the college revenue, expected inflows from SportsClinic are $9M, 7.5M, $8.5M, $6M, and $3.25M for Years 1 to 5.In addition to theabove information, you’ve determined that for the selected clinic,the NPV probabilities are:20% for the worst-case scenario60% for the most-likely scenario20% for the best-case scenarioFinally, the boardwould like your recommendation on other financing options. Ignoringthe previous 11% cost of capital, you’ve discovered that:equity financing costs 15%20% debt financing costs 10% (after tax) with equity costing16%45% debt financing costs 11% (after-tax) with equity costing17%As VP-Operations forNCU MG, assess each clinic option. In your assessment, developtables showing the NPV and IRR for each option. After selecting aclinic to recommend, determine its expected NPV and make afinancing (equity and/or debt) recommendation to the board.

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