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This document contains a group exercise on calculating the net present value of implementing a diabetic counseling service at a community pharmacy. [1] Calculating the NPV at a 5% interest rate yields a positive NPV of $3,141, indicating the project would be profitable. [2] Recalculating the NPV at a 9% interest rate yields a negative NPV of -$3,868, indicating the project would lose money. [3] For the project to make sense, the borrowing rate would need to be below the internal rate of return, which is estimated to lie between 5-9%. If the rate is below 5%, the project would earn money, but above 9%

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105 views4 pages

Assing

This document contains a group exercise on calculating the net present value of implementing a diabetic counseling service at a community pharmacy. [1] Calculating the NPV at a 5% interest rate yields a positive NPV of $3,141, indicating the project would be profitable. [2] Recalculating the NPV at a 9% interest rate yields a negative NPV of -$3,868, indicating the project would lose money. [3] For the project to make sense, the borrowing rate would need to be below the internal rate of return, which is estimated to lie between 5-9%. If the rate is below 5%, the project would earn money, but above 9%

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api-3723612
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© Attribution Non-Commercial (BY-NC)
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Pharmacoeconomics and Health Outcomes

Group Exercise 3: Cover Sheet


Honor Code
Last Name, First Name (PRINTED!) Signature
(i.e. “Submitted with honor”)

1.

2.

3.

4.
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 1 Year 2 Years 3 Years 4 Years 5 Years

Costs -$55,000 -$15,000 -$15,000 -$15,000 -$15,000 -$15,000

Benefits $21,000 $25,000 $29,000 $33,000 $36,000


-$55,000 $6,000 $10,000 $14,000 $18,000 $21,000
NPV $3,141

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 1 Year 2 Years 3 Years 4 Years 5 Years

Costs -$55,000 -$15,000 -$15,000 -$15,000 -$15,000 -$15,000

Benefits $21,000 $25,000 $29,000 $33,000 $36,000


-$55,000 $6,000 $10,000 $14,000 $18,000 $21,000
NPV -$3,868

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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