Consider the project contained in Problem 7 in Chapter 11 (California Health Center). (California Health Center, a for-profit hospital, is evaluating…

Best

0.25

20

$100

$300,000

c.    Finally, assume that California Health Center’s average project has a coefficient of variation of NPV in the range of 1.0 – 2.0. (Hint: Coefficient of variation is defined as the standard deviation of NPV divided by the expected NPV.) The hospital adjusts for risk by adding or subtracting 3 percentage points to its 10 percent corporate cost of capital. After adjusting for differential risk, is the project still profitable?

d.    What type of risk was measured and accounted for in Parts b. and c.? Should this be of concern to the hospital’s managers?