Palms Hospital

1. Address the following issues: A) Define the term incremental cash flow. As the project, at least constructively, will be financed in part by debt, should the cash flows include interest expense? Explain.
-Incremental cash flow is the additional operating cash flow that an organization obtains from taking on a new project. Yes the cash flow should include interest expense as burrowing money was a direct result of taking on this project.

B) The hospital already owns the site for the center, so should any cost be attributed to the land? Explain.
-Since the hospital has already paid for the land five years ago, it should now be considered as a sunk cost. The $150,000 payment has already happened and will not affect the current decision for the proposed outpatient surgery center.

C) What overhead costs should be included in this analysis?
-Only the increase in overhead costs associated with this project should be included in this analysis. Current overhead costs will not change if the project is denied, the only affect to overhead costs will be new costs brought on by the project. In the case of this analysis, the increase overhead costs will consist primarily of housekeeping and building/grounds maintenance.

D) How should the cannibalization of inpatient surgeries be handled?
-The net loss in hospital revenue based on inpatient surgeries should be considered $500,000 in this analysis due to the savings in expenses as well as the lost in revenue brought on by the volume reduction. However, even though there is a negative impact on the inpatient surgeries, there is an overall positive impact on the hospital. The hospital will now have a higher share of the outpatient surgery market, which was stated to have been seeing significant growth. Also, the NPV of the additional financial gain in this project is $881,229;