Assing
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Pharmacoeconomics and Health Outcomes Group Exercise 3: Cover Sheet Last Name, First Name (PRINTED!)
1.
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3.
4.
Signature
Honor Code (i.e. “Submitted with honor”)
Pharmacoeconomics and Health Outcomes Group Exercise Net Present Value A manager of a community pharmacy is interested in implementing a specialized, diabetic counseling service. The costs of this program would include costs of remodeling the counseling area, purchasing patient information and counseling literature, and would require hiring a clinical pharmacist / faculty member from a local college of pharmacy for a few hours each week. The manager estimated the costs and increased store profits for this program as shown below. 1.
Assuming a comparable interest rate of 5%, compute the net present value of this program. Estimated Costs & Benefits of a Diabetic Counseling Service Now Costs
-$55,000
Benefits NPV
-$55,000 $3,141
1 Year
2 Years
3 Years
4 Years
5 Years
-$15,000
-$15,000
-$15,000
-$15,000
-$15,000
$21,000 $6,000
$25,000 $10,000
$29,000 $14,000
$33,000 $18,000
$36,000 $21,000
Net Present Value: ___________________
2.
The pharmacy’s accountant believes that a comparable interest rate of 9% is more appropriate for this project. Re-compute the net present value using this assumption. Estimated Costs & Benefits of a Diabetic Counseling Service Now Costs
-$55,000
Benefits NPV
-$55,000 -$3,868
1 Year
2 Years
3 Years
4 Years
5 Years
-$15,000
-$15,000
-$15,000
-$15,000
-$15,000
$21,000 $6,000
$25,000 $10,000
$29,000 $14,000
$33,000 $18,000
$36,000 $21,000
Net Present Value: ___________________
3.
Under what conditions would it make sense to do this project?
It’s not necessary to calculate the actual internal rate of return (IRR) for this exercise – only to realize that the IRR lies somewhere between 5 and 9%. The project would be a sound investment if you could borrow money at a rate of 5%, as if you can borrow at a rate less than your IRR, you’ll make money. However, if you could only borrow money at 9%, this would be a losing proposition (that is, you’d lose money), and the project should be abandoned.
1.
2.
3.
4.
Signature
Honor Code (i.e. “Submitted with honor”)
Pharmacoeconomics and Health Outcomes Group Exercise Net Present Value A manager of a community pharmacy is interested in implementing a specialized, diabetic counseling service. The costs of this program would include costs of remodeling the counseling area, purchasing patient information and counseling literature, and would require hiring a clinical pharmacist / faculty member from a local college of pharmacy for a few hours each week. The manager estimated the costs and increased store profits for this program as shown below. 1.
Assuming a comparable interest rate of 5%, compute the net present value of this program. Estimated Costs & Benefits of a Diabetic Counseling Service Now Costs
-$55,000
Benefits NPV
-$55,000 $3,141
1 Year
2 Years
3 Years
4 Years
5 Years
-$15,000
-$15,000
-$15,000
-$15,000
-$15,000
$21,000 $6,000
$25,000 $10,000
$29,000 $14,000
$33,000 $18,000
$36,000 $21,000
Net Present Value: ___________________
2.
The pharmacy’s accountant believes that a comparable interest rate of 9% is more appropriate for this project. Re-compute the net present value using this assumption. Estimated Costs & Benefits of a Diabetic Counseling Service Now Costs
-$55,000
Benefits NPV
-$55,000 -$3,868
1 Year
2 Years
3 Years
4 Years
5 Years
-$15,000
-$15,000
-$15,000
-$15,000
-$15,000
$21,000 $6,000
$25,000 $10,000
$29,000 $14,000
$33,000 $18,000
$36,000 $21,000
Net Present Value: ___________________
3.
Under what conditions would it make sense to do this project?
It’s not necessary to calculate the actual internal rate of return (IRR) for this exercise – only to realize that the IRR lies somewhere between 5 and 9%. The project would be a sound investment if you could borrow money at a rate of 5%, as if you can borrow at a rate less than your IRR, you’ll make money. However, if you could only borrow money at 9%, this would be a losing proposition (that is, you’d lose money), and the project should be abandoned.
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