FIRST THREAD NEEDED TO BE REPLIED TO

The Result of a Decline in Business Ethics

Business ethics is defined by “the application of ethics to the special  problems and opportunities businesspeople experience” (Kubasek, Browne,  Barkacs, Herron & Dhooge, 2016, p. 16). When ethical decisions  appear in a person’s life, more likely than not, a plethora of choices  are considered when determining the best course to take for justifying  our actions. In many cases, we consider our Lord and Savior Jesus  Christ, his heavenly father God, our parents, our spouses, our children,  friends, colleagues, physical and mental emotions, plus more before  committing to one-way or the other. However, when the word “business” is  placed in front of ethics, the ramifications are often much larger,  including monetary value, and the effect decisions will have on  stakeholders and the public. First Timothy 6 verses 10 states “For the  love of money is the root of all-evil: which while some coveted after,  they have erred from the faith, and pierced themselves through with many  sorrows” (KJV). By highlighting the definition of Business Ethics as  well as 1 Timothy 6:10, we expose the very public lambasting of  Volkswagen Group, whom recently stated “11 million of its diesel cars  worldwide were equipped with software that was used to cheat on  emissions test” (Lippe, 2015). A multitude of responses, questions, and  political backlash reduced Volkswagen’s image in the public, however, we  will identify the steps that should have been enforced to prevent this  incident, starting at the managerial level and ending with the Chief  Executive Officer (CEO).

As children of God, we are instilled with the rationale between what is  right and wrong. James 4 verse 17 (KJV) states “Therefore to him that  knoweth to do good, and doeth (it) not, to him it is sin”. We are  endowed with the conscious capability to distinguish between doing  something right and doing something wrong, however, when we choose to do  something wrong, it is considered a Sin. Other factors may weigh  heavily for or against the determination of right or wrong to include  family beliefs, childhood, and life experiences. Nevertheless, as  employees working in the Legal office or the Engineering department of  Volkswagen, the responsibility to determine the best ethical, moral, and  legal path fell squarely on each and every employee to make the correct  decision, and if something was legally, morally, or ethically wrong,  say something to someone such as the Department Director, or CEO. If  fear of retribution was prevalent amongst the employees in these  departments, they should have contacted an anonymous reporting service  to present the evidence in question.

First, employees should have known there had to be something or someone  who they could report the infractions to regarding the software which  cheated diesel testing requirements. For instance, the Sarbanes-Oxley  Act of 2002 was established by Congress to protect corporate insiders  and create an anonymous reporting system for employees to present  suspicious activity by companies (McClurg,  2017). Additionally, the Dodd-Frank Act prevents Whistleblower’s, or  those who implicate their company for illegal activity, from being  discharged, demoted, suspended, threated, harassed, or removed for any  attempt of reporting the illegal activity (McClurg, 2017). Aside from  these provisions by Congress, there are multiple employee guidelines for  reporting suspicious behavior, on top of the character and courage to  stand up for what is right, and socially responsible from a company, and  an individual. Ideally, managers should have prevented this by asking  questions, remaining aware, and conscious towards the behavior of  employees and the reporting systems in place for protection, especially  since “If God is for us, who can be against us?” (Romans 8:31 KJV).

Secondly, managers or employees in Volkswagen Legal or Engineering  department, must have known that the people affected most by this  decision to cheat the software detecting system was there stakeholders,  which includes the company. For instance, Cremer and Taylor (2016)  reported that Volkswagen would take a $18.2 billion loss due to the  diesel deception scandal the company attempted in 2015. Although a loss  of $18 billion may not deplete Volkswagen of their assets, as it may  numerous companies across the world, the image and trust from customers  have drastically been impacted, and that is something that cannot be  repaired so quickly.

As the CEO of the diesel division of Volkswagen, they should have taken  full responsibility for the mistake and attempt to cheat software  detection. Afterwards, if not arrested by the Police, could have  launched a massive legal investigation into the reason why 11 million  cars were equipped with diesel deception software, in order to identify  the areas of failure from the management and legal/engineering offices,  and hold as many people accountable as possible. This response would  have revealed to the public, business ethics is much more complicated  than people imagine. In a competitive, business-run environment, money  and production become the figures of success, and through cheating the  diesel software technology, Volkswagen was able to attract more money,  product, and customers around the world. Additionally, this type of  legal investigation would perhaps reveal as Clegg, Kornberger and Rhodes (2007) stated:

Ethics  cannot be encapsulated in lists of rules that inform action; thus,  there can be            no ‘one best way’ in which good ethics may be  guaranteed through prescription, judgment or legislation. The concept of  ethics as practice cannot offer a clear black and      white grid that  divides the world into good and bad; things are more complicated. (p.  13)

Business ethics is not as easy as deciding upon right and wrong. There  are multiple ethical dilemmas that could appear, however, the basis for  decisions should be the best legal course that would potentially  increase value for the stakeholders, no matter the situation.  Additionally, an investigation into the failures of the Volkswagen  reporting system, would identify the reinvigoration of legal outlets for  suspicious reporting such as the anonymous report hotlines, employee  confidentiality policies, and clear guidelines to preventing something  like this from happening again. Also, the CEO or investigator leading  the investigation may unveil what systemic or deliberate cover-up  occurred such as Lippe (2015) belief that Volkswagen  engineers neither discussed with nor hid what they were doing from  Volkswagen’s in-house lawyers, and the in-house lawyers didn’t realize  what was going on.

Ultimately, Volkswagen’s decline in business ethics stemmed from the  competitive misconception that cheating was an attempt at achieving  company goals. The sorrows that follow the obsession with money can lead  to illegal activity, penalties, fines, and supporting the wrong-doings  of others. Furthermore, the lack of character or failure to report the  wrongdoings by employees, must be fortified and consistently addressed  from the executive level down to the lowest employee. Although an $18  billion loss is large and galvanizing, the timeline for repairing the  damage done to the environment, customers, and other stakeholders could  take decades and cost exorbitant figures.

References

Clegg, S. , Kornberger, M. and Rhodes, C. (2007), Business Ethics as Practice. British Journal of

Management, 18: 107-122.

Cremer, A., & Taylor, E. (2016). Volkswagen takes $18 billion hit over Emissions Scandal.

Retrieved from https://www.reuters.com/article/us-volkswagen-emissions-germany-

probe-idUSKCN0XJ19U

Kubasek, N. K., Browne, M. N., Barkacs, L., Herron, D., & Dhooge, L. (2016). Biblical

worldview edition of dynamic business law. N. J. Kippenhan (Ed.). New York, NY:

McGraw Hill Education

Lippe, P. (2015). Volkswagen: Where were the lawyers? ABA Journal. Retrieved from

http://www.abajournal.com/legalrebels/article/volkswagen_where_were_the_lawyers/

McClurg, D. D. (2017). Whistleblower protections: Internal reporting and dodd-frank’s anti-

retaliation provision. Labor Law Journal, 68(3), 156-164. Retrieved from

http://ezproxy.liberty.edu/login?url=https://search-proquest-

com.ezproxy.liberty.edu/docview/1936467803?accountid=12085

SECOND THREAD NEEDED TO BE REPLIED TO

Discussion Board Forum 1: Volkswagen Scandal

Jordan Contreras

Liberty University

June 3, 2018
Prevention of the Emissions Scandal

In  September of 2015 Volkswagen recalled around 500,000 diesel cars and  the company lost around $16.9 billion dollars of the company’s market  value (Jung and Bin, 2017). According to Jung and Bin (20117) 11 million  of their diesel cars contained a device that would change emission  levels during diesel-exhaust tests. When this scandal hit the media,  Volkswagen had a huge economic damage occur and they lost many  shareholders in the stock market. Diesel vehicles are typically known  for the benefits they have with durability, repair cost, and fuel  efficiency. So, when Volkswagen designed a car that was supposed to be  the top of the line the sales sky rocketed which helped with  Volkswagen’s ratings in the market. The Volkswagen scandal really hurt  their reputation, and by the CEO of the company not being honest it made  the consumers frustrated with the company and destroyed their  credibility.

According to the bible “The Lord detests lying lips, but he delights in  people who are trustworthy” (Proverbs 12:22, New International  Version). As an employee or manager in the legal office or the  engineering department I would have done a couple of things differently  to prevent this problem. First if I was an employee and I noticed  something was off or didn’t seem quite right I would have immediately  reported the incident to the managers or executive team. This would have  escalated the issue to the senior executives that way everyone is  informed of the situation.

As  a manager you have a couple of options that could have taken place in  order to prevent this incident. I would have designed an ethics and  compliance training program, made my team take the course, led by  example, created a strong culture to enforce policies, and designed a  strict hiring policy. When designing the ethics and compliance training  program I would have made is mandatory for my team to take. In addition  to this I would made my team sign a paper showing that they took the  course. This would hold them accountable for their actions if any  mischief or foul play were to of taken place. Next, I would lead by  example. I would hold my team accountable for their actions and make  actions have rewards and consequences. This would go in hand with  creating a strong culture to enforce policies and procedures. Rules and  laws are created for a reason. No acceptation. So, by holding my  employees up to high standards you can set the expectation that foul  play is not permitted. Lastly, I would create a strict hiring process to  ensure you are hiring the most trust worthy candidates. In order to  achieve this goal, I would design mandatory behavioral and personality  test that will need to be taken prior to interviewing and do an  extensive background check. By making candidates take a behavioral test  you are able to gauge what type of personality they may have, that could  lead up to foul play. There were several actions that Volkswagen could  have taken to help gain credibility in the media but instead they  decided not to admit their actions were wrong and deceiving. In result  to their actions that they made they lost valuable customers and ruined  their credibility in the market. As a manager I would of done several  things differently to prevent this incident, held true to my morals and  the way God would of wanted me to take action.

Damage Control and Honesty from the CEO

The CEO of Volkswagen was given an impossible situation to handle when  the media broke free that the company and deceived so many people.  “Corporate fraud committed under climate mitigation pressure is becoming  more frequently observed in line with the ever-increasing environmental  standards and relevant regulation enforcements” (Li, McMurray, Xue,  Liu, Sy, and 2018). However, the bible say’s “whoever walks in integrity  walks securely, but he who makes his ways crooked will be found out”  (Proverbs 10:9. New International Version). Lying is never the answer,  you will get caught. To live in a Godly way, you have to admit the  mistakes made by you or your employees. Being honest helps with your  credibility, the company’s credibility and ensures that we are making  choices the way God would want us to.

When  the media broke free about the scandal, as the CEO over the diesel  division I would have first gathered all of the facts. I would have done  as much research as possible, brought on a team of investigators to  look into the incident, and immediately terminated those involved. As a  final step I would have held a press conference to speak openly about  the incident that occurred, and recalled all vehicles involved. During  this press conference I would have gone over what we as a company are  doing to handle all of the recalled vehicles, what we intend to do to  accommodate those customers affected by the incident, and gone public  about the termination of employees involved in the incident. By showing  the public that we are taking matters very seriously could help save the  company’s reputation. To prevent future incidents from occurring strong  policy and procedures needs to be written and enforced. When the legal  team is telling engineers not move forward with the incident and they do  so anyways this needs to be escalated up to the proper executive. If  the executives choose not to solve the incident than it needs to be  reported so legal action can take place. When preventing future  incidents than Volkswagen has to be up front and honest with the  situation at hand. There are no exceptions to cheating to getting a  head. You are ultimately hurting the company even more and aren’t living  in the way of god. Investigations need to be occurring but at random  time periods to ensure that the company is abiding by the rules. The  findings of the investigations need to be made public. When rebuilding  Volkswagen’s reputation, you need to be up front and honest about  everything going on internally. It is important to live by the way of  God, keep your morals, report anything unethical that is occurring, and  remember that the customers are what drives the sales of the business.  You will drastically hurt yourself in the market if they feel that they  are being lied and manipulated. Since Volkswagen has made poor choices  around their scandal they now need to do damage control and be  transparent with their customers and make everything public.

Case Assignment

UNIVERSITY OF VIRGINIA HEALTH SYSTEM:

THE LONG-TERM ACUTE CARE HOSPITAL PROJECT

Pages 381-390

Idea of the case

This case puts students in the shoes of Larry Fitzgerald, the vice president for business development and finance at the University of Virginia Health System (UVa Health System). Students must decide, based on cash flow analysis and nonfinancial factors, whether or not to propose a long-term acute care hospital (LTAC) project to the board of directors of the U.Va. Health System. The LTAC is a very promising undertaking from the perspective of providing better care for patients, but the financial drivers of the project have yet to be assessed.

The primary objective in this case is to portray the major differences in project analysis for nonprofit organizations compared to for-profit companies and to highlight the unique issues relevant in a health care environment.

Questions

1. What are the nonfinancial drivers for adding an LTAC facility to the U.Va. Health System? What are potential reasons the board may not approve the project from a nonfinancial standpoint?

Hints: You can provide points from the case as to why the LTAC facility would be a good addition to the U.Va. Health System from the perspective of the hospital, the patient, and overall health care.

Students could suggest several reasons the board may not approve the project

2. What are the differences between nonprofit institutions and for-profit institutions? For example, how would a for-profit hospital approach the LTAC decision?

3. What is the average cost of capital of the for-profit hospitals provided in case Exhibit 3? Would this serve as a reasonable discount rate to analyze a set of for-profit LTAC facility cash flows? Should Fitzgerald use this number to discount the U.Va. LTAC facility’s cash flows?

Hints: Use a market risk premium (MRP) of 6% and the 10-year Treasury yield as the risk-free rate.

Use the data provided in Exhibit 4 page 390.

Determine the WACC in two cases: tax rate = 35% and tax rate = 0.

4. Using the information in the case and the memo from Karen Mulroney in case Exhibit 1, complete the cash flow projections in the spreadsheet provided. What do you get for the NPV and IRR of those cash flows?

5. What are the main drivers for NPV and IRR? Show the impact on NPV and IRR by changing a couple of these drivers to a “downside scenario” value.

Based on your financial analysis, should Fitzgerald propose the LTAC project in the board meeting.

Supporting Spreadsheet Data

The supporting Excel files are available for the convenience of students:

Q1. What are the nonfinancial drivers for adding an LTAC facility to the U.Va. Health System? What are potential reasons the board may not approve the project from a non-financial standpoint?

LTAC will benefit U.V.A in many areas such as; adding up to 25 beds per day for each transferred patient, boost money for patient care, work through matters that oppose many of the hospital systems, improve efficient patient turnover, addressing the bill insurance from both hospital stay and time spent in the LTAC. Moreover, it will be built within the U.Va On January 2007, the Centers of the Medicare and Medicaid services (CMS) halts the establishments of the facility. For them to build the facility they will need to have a loan of $15 million capital investment and the board want to acquire 5% profit margin.

Non-financial drivers for adding an LTAC:

-The LTAC hospitals are attractive financially as they increase revenues from patients who are taken care of by the system. Moreover, the hospital was paid insurance for patients staying regardless the time patients spent. This would allow the hospital to bill the insurance for both services of LTAC service and time spent in hospital. The addition of LTAC benefits the hospital in the reduction of expenses and capacity concerns.

– The hospital would be able to decrease the average expenses of a patient’s stay up to 50% from $3000 to $1500.

– adding an LTAC will increase capacity of beds in the rate of 25 beds per day due to the process of transferring the patients to the LTAC thus providing space for new admissions n the main hospital.

-LTAC patients are taken of more conscious way due to their circumstances; therefore they receive higher care and morale compared to a regular hospital. This allows a faster recovery period and reduced infection rate. Each patient has his own room that made them more comfortable at their stay. They became proverbial with their caregivers due to their long stay. This built a sense of comfort friendly environment. The personalized care made patients recover faster.

– This addition adds up to the objectives and goals of the hospital of providing highest quality health and continuum care. This is due to the higher quality care that would be offered compared to the service offered at a tradition al hospital.

Reasons for board disapproval:

–cost of the project: the cost would be the $15 million loan. it is vital to evaluate the hospital’s financial state via its bond rating to cover their financial commitments. This is due to the inverse relation between the ratings and cost of debt, as the lower the rating the higher the cost of debt. When it comes to valuating the project, the board’s main objective is to maintain the rating of AA. Moreover, retaining this credit rating allowed the hospital to maintain a low borrowing cost and to compete effectually for debt dollars in future.

–low utilization rate: it is expected for the LTAC facilities to have an increase in capacity to 26% in the upcoming year till the Medicare Certification is approved. Moreover, the usage of facility is essential for maintaining the hospital and for matching it with the costs of the project.

– Hospital’s reputation: in the case of the patient’s increased reside time for more than the 25 days, would concern and worry patients that the hospital may not extend their time. Therefore, the hospital’s reputation may be imperiled.

–Gross Profit Margin– the board wants to achieve a 5% profit margin within the star up of the project, and this may not reach it and thus they may not be able to cover their costs.

Question 2: What are the differences between nonprofit institutions and for-profit institutions? For example, how would a for-profit hospital approach the LTAC decision?

A nonprofit institution is more advantageous than the for-profit institution because they do not respond to shareholders as its objectives are focust on stakeholders’ interests and not the goals of its owners.

Difference between Non-profits and For-profits institutions:

Non-profits:

· The institutional culture is service-driven.

· There is no tax burden; however they should cover the borrowing cost.

· Requires a low margin while managing to meet the objectives of providing clinical care. They need to maintain the bond rating at the investment rate.

· Funded by the government, private sector, or corporations that have a CSR policy.

· Non-profit hospitals’ main priority is the heath and not the profits. This improves the society overall.

· They are less likely to generate profits from operations.

· Aims towards the overall well-being of the society by supporting the poor and unprivileged.

For-profits:

· The institutional culture is business-driven.

· There is property and income taxes. They must cover tax expenses and the equity cost of capital.

· Requires a pre-tax profit margin of 15% for a capital investment.

· As any other business, expansion and growth is a strategic objective.

· Their main intention is generating profits, which harms the society indirectly.

· The main purpose is to add value and generate a return for shareholders. They need to meet the investors’ expectations.

· Aims towards the highest quality of services and products to customers in the market, especially for niche members.

For-profit hospital approach to the LTAC Decision

Since the For-profit institutions’ main purpose is to generate profits, increase shareholder value and to increase the quality, the LTAC is a great opportunity as they would add more beds, increase the revenue, and decrease the costs associated with treatments. Moreover, the hospital would be able to increase the capacity of patients in rolled into the hospital. The critical cases would be transferred to the LTAC facility as a critical patient takes more than 25 days to recover while a normal patient takes an average of 5 days to recover. Thus, for-profit hospitals should approach the LTAC facility as that would add overall value to their organization. Furthermore, the LTAC has beneficial financial drivers. The hospital could charge the insurance company for their services; and if the patient is to be transferred to the LTAC, then they could bill for the special treatment provided to the patient during his stay.

In order to know how much profits the LTAC must earn to be accepted, we must have a positive NPV that is greater than zero. That would cover all the expenses, as well as give a sufficient ROE. NPV is calculated based on cost of capital upon which both the cost of debt and equity reflect. Other financials that would support the board of directors’ decision would be the projected cash flows, net present value, internal rate of return and the payback period. Through using the WACC, it has been indicated that the NPV is positive, and so the nonprofit entity should rest assured that the investment is creating value. Finally, if the investment meets the for-profit required return, it should easily meet all the financial requirements of a non-profit.

Q3. What is the average cost of capital of the for-profit hospitals provided in case Exhibit 3? Would this serve as a reasonable discount rate to analyze a set of for-profit LTAC facility cash flows? Should Fitzgerald use this number to discount the U.V.A. LTAC facility’s cash flows?

Hints: Use a market risk premium (MRP) of 6% and the 10-year Treasury yield as the risk-free rate.

Use the data provided in Exhibit 4 page 390.

Determine the WACC in two cases: tax rate = 35% and tax rate = 0.

The weighted average cost of capital (WACC) is defined as the cost of the individual sources of capital. The make-up of capital is usually comprised of the equity that shareholders have decided to invest in the company, with each source being proportionally weighted individually. By calculating the WACC shareholders or lenders would will be able to appropriately estimate the return that would be earned if and when they decide to invest in the company. So, the WACC (Weighted Average Cost of Capital) can also be defined as the minimum rate of return that investors will expect to get from their investment. It is the lowest rate of return that a firm will have to earn in order to achieve a breakeven point.

The data that will be provided in the excel sheet in Exhibit 3 shows that the cost of capital, and cost of debt were calculated in order to get the WACC for the for-profit hospitals. By viewing WACC sheet in the attached excel one can see the summary of the WACC calculations for each for-profit healthcare company.

The steps that will be used to calculate the WACC are shown in the excel sheet, but they are also listed below:

Steps for WACC calculation as seen in the excel sheet:

· The formula used is:

Weighted Average Cost of Capital (WACC)= Wd x Rd x (1-T) + We x Re

Where: Wd= weight of debt Rd= cost of debt We= weight of equity

Re= cost of equity T= tax rate

· To calculate the WACC the first step that needs to be taken is for us to calculate the percentage of debt (Wd) in the capital structure, this is done by using this formula: Debt/ (Debt + Market Capitalization).

· The percentage of equity (We) should also be taken into consideration this is done by subtracting the percentage of debt calculated in step 1 from 1 (1-Wd or % debt).

· Calculating the cost of debt (Rd) comes next, where the corporate bond yields from Exhibit 4 (US Treasuries and Corporate Bond Yields) were used for the A, B, and BB ratings.

· The cost of equity (Re) is calculated by using the CAPM (Capital Asset Pricing Model) formula: Rf + Beta * Rm, using the risk-free rate (Rf) as the 10-year Treasury Yield and a market risk premium (MRP, Rm) of 6% these numbers were taken from the excel sheet and from the hints above.

· The last calculation that needs to happen to determine the WACC from the above-mentioned formula is to see the effects on it using two different tax rates, tax=35% and tax=0%.

What is noticeable in the attached excel for the for-profit healthcare companies, the higher the rating of the bond, the lower the WACC is and vice versa. The lowest achieved WACC in a tax = 35% category is by HCA Inc. (6.97%), it carried a bond rating of A, a yield of 5.45% and a beta of 0.60. The highest achieved WACC when using the same tax rate is by Manor Care Company (8.42%) which had a BB rating, a 6.79% yield and a 0.80 beta. When using a tax rate of 0% to calculate WACC it will show the same results were achieved, with HCA Inc. with the lowest WACC (7.51%) and the highest WACC with Manor Care (8.93%), this shows that the most important factors when calculating the WACC are cost of debt, beta and tax bracket.

Cost of debt, one of the three components, is considered to be the most important. This is due to the increase in the shareholder’s concern, since the investors have a belief that the greater the amount of debt a company has, the greater the risk of a default. This will result in a greater return on investment expectation from investors. Beta is also considered to be an important component as it will measure the covariance between the rate of return of a particular company and the systematic risk (overall market return). Lastly, tax bracket also contributes to the WACC as that means that the lower the tax the greater the WACC and vice versa.

The WACC that are calculated in the excel sheet would be able to serve as a reasonable discount rate to analyze the for-profit LTAC facility cash flows. In addition, this rate can be used by Fitzgerald to discount the University of Virginia Hospital LTAC facilities’ cash flows even though they are both different in nature as UVA being a non-profit hospital. The WACC that should be the most appropriate to use is the average of all the for-profit healthcare companies, so the assumption will be that UVA will operate like a for-profit. So, for the valuation and forecasts purposes, the average WACC for a tax rate of 0% is 8.21%; the reason for this specific tax rate is since UVA is a non-profit they will not pay any taxes. When comparing UVA to different healthcare service providers, HCA Inc. will be considered to be the most comparable company since they have an A bond rating and University of Virginia Hospital has an AA bond rating.

Q4. Using the information in the case and the memo from Karen Mulroney in case Exhibit 1, complete the cash flow projections in the spreadsheet provided. What do you get for the NPV and IRR of those cash flows?

To calculate the Net Present Value (NPV), we should calculate first the difference between the present value of cash inflows and cash outflows. The NPV is used to analyze the profitability of an investment or project.

The formula for NPV is:

The Ct in this case represents the net cash inflow, the Co represents the total initial investment costs, the r represents the discount rate, and the t represents the number of time periods. The NPV that is calculated gave a total of ($15,124.13), which is a positive number, what this number indicates is that their earnings exceed their costs, this means that their project is profitable.

In addition, the Internal Rate of Return (IRR) is the discount rate that will depend of the NPV calculations of all cash flows, this is used to measure the profitability of investments. The IRR that was found after calculation is (22.67%) and this will be used to rank the multiple projects of the firm.

· For the financial projections, the first step taken was to compute the number of patients each year for insurance payers. The total number of patients was then multiplied by the patient mix percentages. The following step was to multiply the number of patients by each insurance payer’s billing rate per patient. The last step in this process is to deduct the (1%) uncollectible billings from the revenues.

· Second, the total expenses were calculated which includes the salaries, wages and benefits, supplies, management fees, fixed and variable operating expenses, land leases and construction. For the salaries, wages, and benefits expenses were calculated by multiplying the full-time employees by the patient days per year. The supplies, drugs, food and management fees were calculated by multiplying the net revenue by the percentage of the net revenue.

· The second calculation to be done is, the total expenses were calculated which includes the salaries, wages, benefits, supplies, management fees, fixed and variable operating expenses land leases and construction. To calculate salaries, wages and benefits expenses this was done by multiplying the full-time employees by patient days per patient days per year. The supplies, drugs, food and management fees were calculated by multiplying the net revenue by the percentage of the net revenue. Operating expenses are an annual fixed charge of $1.2 million. Land lease is 200,000 and divided by 1000 then after the first year then will be an annual increase of 3%. Moreover, the cost of the construction of the building was depreciated by 30 years of the 15,000,000.

· Then the operating profit and operating margin was calculated. The operating profit was then calculated by deducting the expenses from the revenues. For the operating margin, the operating profit was divided by the total revenue.

· The next calculation there is a change in net working capital, this change was calculated by calculating the account receivables, inventories and account payable. The Net Working Capital = current assets – current liabilities which in this case is ((AR + Inventories) – AP).

· Free cash flows is measured by adding the operating profit with deprectiation, deducting the capital expenditure and the net working capital. Then to compute the NPV of the cash flows, the addition of the Net Working Capital Recovery and the Sale of Facility at book value is done.

· NPV is ($15,124.13) and IRR is (22.67%)

· All these steps for calculations are shown in the excel sheet.

Q5. What are the main drivers for NPV and IRR? Show the impact on NPV and IRR by changing a couple of these drivers to a “downside scenario” value?

For us to comprehend the main drivers for IRR and NPV we will have to examine the values that greatly affect the hospital’s cash flow. Most of the profits earned is from admitted patients, and the amount of capacity they use on patient days. So therefore one of the main drivers of the IRR and NPV is from utilization rate. If we considered the worst case scenario for the utilization rate in the second year is 45% , according to Mulroney’s memo exhibit. However, the growth rate that relates to the utilization rate