FMCC Management Cash Flow Estimation Concepts Questions

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I’m working on a management multi-part question and need the explanation and answer to help me learn.

The most difficult, yet most important, step-in evaluating capital investment proposals is cash flow estimation. This step involves estimating the investment outlays, annual net operating flows, and cash flows associated with project termination. Many separate (component) cash flows are involved, and many individuals typically participate in the process.

1. Briefly define the following cash flow estimation concepts. Provide an example of its use in real life. Each definition and example should be 2 paragraphs – one for the definition and the second for the example use.

a) Incremental cash flow

b) Sunk costs

c) Opportunity cost

d) Strategic value

e) Inflation effects

2. Define financial risk. Why is risk analysis so important to capital investment decisions? Explain the impact of the risk as if you were purchasing a new piece of equipment.

3. Describe the qualitative approach to risk assessment. Why does this approach, which does not rely on numerical data, work?

4.Capital investment decisions are often large investments in HSO’s ie: radiology equipment, surgical equipment, radiation therapy equipment.

• What categories do HSO’s classify capital projects into? And what is the advantage of doing so?
• Provide an example of return on investment (ROI)? In your own words, provide a hypothetical scenario for which an HSO’s will make a large capital investment which in turn will provide a high ROI.
  • IE: A local community hospital would like to open a radiation therapy center in order to provide cancer services to their patients locally. A radiation therapy center is an expensive initiative for this hospital; but the return on investment will be significant as the reimbursement for radiation services is high and the downstream revenue to the hospital for patients undergoing cancer treatment creates a large return on investment.