You run a health care system that must decide whether to accept a purchase offer

Question

You run a health care system that must decide whether to accept a purchase offer by another health system for one of your facilities. The other system is willing to pay $48 million for your facility. Your chief financial officer estimates that the net cash flows from this facility during the next eight years, if you do not sell it, will be listed in the table below.

A)If the appropriate discount rate is 12 percent, what is the net present value of the offer to your organization?

b) Should your health system accept the offer? why or why not?

Year Net cash flows

1 $8,500,000

2 $9,500,000

3 $10,500,000

4 $10,000,000

5 $11,000,000

6 $12,000,000

7 $12,000,000

8 $11,500,000

Explanation / Answer

a) net present value = +48,000,000 - 8,500,000/1.12 -9,500,000/1.12^2 - 10,500,000/1.12^3- 10,000,000/1.12^4 - 11,000,000/1.12^5 - 12,000,000/1.12^6 -12,000,000/1.12^7 - 11,500,000/1.12^8= -3,385,617.51

b) your health system should not accept the offer because NPV is negative

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