Question

Capitol Health Plans, Inc., is evaluating two different
methods for providing home health services to its |
||||||||

members. Both methods involve contracting out for services,
and the health outcomes and revenues are |
||||||||

not affected by the method chosen. Therefore, the
incremental cash flows for the decision are all
outflows. |
||||||||

Here are the projected flows: |
||||||||

Year |
Method A |
Method B |
||||||

0 |
-$300,000 |
-$120,000 |
||||||

1 |
-$66,000 |
-$96,000 |
||||||

2 |
-$66,000 |
-$96,000 |
||||||

3 |
-$66,000 |
-$96,000 |
||||||

4 |
-$66,000 |
-$96,000 |
||||||

5 |
-$66,000 |
-$96,000 |
||||||

a. What is each alternative's IRR? |
||||||||

b. If the cost of capital for both methods is 9 percent,
which method should be chosen? Why? |
||||||||

Answer #1

Year | Method A | Method B |

0 | (3,00,000) | (1,20,000) |

1 | 66,000 | 96,000 |

2 | 66,000 | 96,000 |

3 | 66,000 | 96,000 |

4 | 66,000 | 96,000 |

5 | 66,000 | 96,000 |

IRR (part a) |
3.26% |
75.15% |

NPV (part b) |
(43,283.02) |
2,53,406.52 |

Note: IRR & NPV calculated using IRR & NPV functions.

Formulas:

IRR function: =IRR(CF0,CF1,CF2,CF3,CF4,CF5)

NPV function: =NPV(9%,CF1,CF2,CF3,CF4) + CF0

14.3 Capitol Healthplans, Inc, is evaluating two different
methods for providing home health services to its members. Both
methods involved contracting out for services, and the health
outcomes and revenues are not affected by the Method chosen.
Therefore, the incremental cash flows for the decision are all
outflows, Here are the projected flows: Year Method A Method B 0
($300,000) ($120,000) 1 -66,000 -96,000 2 -66,000 -96,000 3 -66,000
-96,000 4 -66,000 -96,000 5 -66,000 -96,000 a. What is each...

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Determining the Value of the Business
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you need to analyze all the infor- mation you have gathered. This
is the time to consult with your business, financial, and legal
advis- ers to arrive at an estimate of the value of the business.
Outside advisers are impartial and are more likely to see the bad
things about the business than are you. You should...

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