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FIN 620 FINAL PROJECT

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chris sapone

on 27 February 2015

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Transcript of FIN 620 FINAL PROJECT

Sell and Upgrade
ASSESSING NEW PROJECT RISK: To Expand or Build Anew
Porter Starke Services
By: Wade Clark, Nathan Leigh, Conrad Victor & Chris Sapone
Treatment Facility: Opiate Addiction
Current capacity: 50 patients
Major repairs needed
CONSULTATION
TWO OPTIONS:
1. UPGRADE CURRENT FACILITY
ADDITIONAL SPACE
TREAT INCREASING NUMBER PATIENTS

2. BUILD NEW FACILITY
RISKS INHERENT:
Unpredictable patient inflow
cost
delay in patient treatment
POTENTIAL BENEFITS:
Increased customer satisfaction
potential customer increase
Current Advantage
Current building paid in full
only opiate treatment facility in Northwest Indiana
CASH FLOW CALCULATIONS
Cost of debt = 0
Cost of equity =.12% + 1.0(10% + .12%) = 10.24%
Growth Rate =17.22%
Cost of equity low risk=.12%+1.259(10%+.12%)=12.86%
PV of cash flows =$5,486,811
less risky for expansion
Cost of Equity high risk=.12% +1.338(10%+.12%)=13.66 %
PV of cash flows =$49,688
Start-up new facility much more risky
no profit until second year
no significant client base until year 4/5
Expand Current Location:
BETA ANALYSIS:
For the health care industry, we need to adjust betas by 0.259 to 0.338 for new projects, beyond the institution's beta for assets in place. The increase in beta used depends on the perceived risk of the cash flows
of the new project.

To illustrate this point, assume an organization's beta for its assets in place is 1.0. Then the beta for its new projects should range from 1.259 to 1.338, reflecting high and low risk projected cash flows for new projects.

Companies with the same risk as the overall market will have a beta of 1. Therefore, we used a beta of
1.
Recommendation
Low spread between low and high risk ventures
Renovation of current facility is the best option (higher NPV, lower interest cost)
location already owned
land available to upgrade building
maintain current cash flows
PRO FORMA
OPERATING ASSUMPTIONS
ASSUMPTIONS CONT.
Average program cost $6490
Thank You!
Questions?
(Choose them carefully...)
Current Opiate treatment center book value
Annual revenue @ 50 patient capacity
Annual Growth rate
Total expansion costs to double size & capacity
Annual interest on government loan for expansion
Term (years)


NPV for the first 4 years post-investment

$1,100,000
$1,305,889.00
17.22%
$800,000
3%
30.00


$5,547,782.02

Current Opiate treatment center book value
Annual revenue @ 50 patient capacity
Annual Growth rate
Cost to purchase parcel and build a new facility
Annual interest on bank loan for new facility
Net cost after sale of current property
Term (years)
Expected construction time
Sale of old building after construction completion


NPV for the first 4 years post-investment

$1,100,000
$1,305,889.00
17.22%
$1,900,000
4.5%
$800,000
30.00
1 year
$1,100,000.00


$5,274,159.88
Full transcript