UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 11 -- The Basics of Capita

Question

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Chapter 11 -- The Basics of Capital Budgeting

PROBLEM 3
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 opportunity cost of capital for both methods is 9 percent, which method should be chosen? Why?

Explanation / Answer

All cash flows were outflows, how u considered them inflows?

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