Title:

Blood Bank

Course:

Corporate Finance

Course No.:

B5500-400

Term:

Fall 2016

Instructor:

Roger Mesznik

Student Name: Miles Hu

Jessica Ming-Chen Lee
Brian Li
Evita Wei Liu
Zhanara Nazarova
Roman Petr
Study Group:
Date:

Group 6
Sept 9th, 2016

Institution:

Faculty:

Course:

B5500-400
Corporate Finance
Fall 2016
Instructor: Prof. Roger Mesznik
Address: Uris Hall; Room 218F
Ph: 1.212.854.5308
email: rm21@columbia.edu
HOW TO REFLECT OPERATING FLOWS IN FINANCIAL FLOWS AND STATEMENTS
This material is distributed solely for the purpose of helping students
It is not a substitute for attending classes
It is to be used by registered students only
All uses must conform to class needs, and may not give rise to conflicts
The material may not to be used for any unrelated activity, or any commercial exploitation
The author retains all rights to the material, its explanation, and the examples
The explanations are not meant to convey a single correct answer
The author retains the right to alter and modify all elements, including answers and explanations
These handouts form only a part of our analysis and discussion
We model a transaction as described below
As we discuss the numbers and concepts, we will review all necessary definitions.
We assume originally that the center is a not-for-profit entity
We will introduce taxes later as quite a few of you will work in taxable entities.
Please know immediately that the introduction of taxes has a non-linear effect.
For example, if your tax rate is 30%, it does not mean that your after tax profits will be
equal to 70% of your pretax profits.

For reasons of convenience and accuracy, we prefer to enter all parameters in one place.
This allows us to make modifications as needed, without risking crucial omissions.
Furthermore, it allows us to create some sensitivity analyses in a very efficient manner.
Clearly, you may want to ascertain that all assumptions are reasonable and consistent with each o
As you will see below, some assumptions are more crucial for the validity of the outcome than othe
Frequently asked questions:
Should we embed safety factors in the individual estimates and projections as we proceed?
Is it not presumptuous to forecast anything beyond a handful of years into the future?
Are there any models one can use when making such forecasts?

If I know that my forecast for any one item is a range forecast and not a point forecast, how
and where is this knowledge embedded in my calculation?
If it turns out after the fact that my realizations were close to my forecasts, is this a proof
of the quality of my work?
Conversely, if it turns out after the fact that my forecasts were way off the mark, does that
mean that my work was of lower quality?
What is risk? Uncertainty? Unpredictability? And how do they impinge on my work?

Project:
Products:
Sold to:

Collection center for blood donations

Plasma and cells
Own hospital as well as others in the network

Parameters:
Horizon
Discount rate:
Discount rate:
Expected inflation:
Depreciation of equipmt:

Overhead
Overhead
Delay in reimbursement:
Delay in payments:
Loss rate of donations:
Gift to donors:
Var costs
of collection bag etc
Phlebotomist
Supervisor, Fill-in
Seats p. phlebotomist
Seats in donation area
Price per unit sold
Centrifuge
Cost of centrifuge
Capacity of centrifuge

10.00 years
7.55% Cost p.a.
Nominal or real?
2.25% p.a.
SL
By use
MACRS 3 yrs
4,000.0 p.m.
4.00 per
donation
0.25 years
1.00 month
15.00%
10.00

Issues:
Engineering? Financial?
COC? WACC? Hurdle rate? Expected return?
Assume it is across the board
For financials
For analysis
For taxes, when needed
Grows w inflation, imposed as a lump sum
for billing and management of the center
grows also with inflation

Due to expiry and mishandling

In first year, rises w inflation, rounded to neares

12.00

Rises w inflation

17.00
5.00
4.00
31.00
87.00

Capacity per workday

Max Phlebotomists to be supervised
When on full capacity
Not all need to be used
Average for plasma and cells; no inflation effect

6.00
54,000
100.00

years
When acquired
units per week, net of downtime

Opening times
6.00
Full days a week
Opening times
50.00
Weeks a year
Cost/phleb
1,000.0
per week, increase w inflation
Each phlebotomist and supervisor work only
5.00 days per week
Downtime due to uneven use
18.00%
Cost per supervisor
1,700.0
per week, increase w inflation
Plan:
Open with
3.00 phlebotomists for first year
expect to increase the number as needed
Supervisor must always be there
expect to start with
8,000 donations first year

Calculate and provide:

1. An operating and finance model of the blood donation center
2. A balance sheet of each year of operation
3. An income statement of each year of operations
4. A statement of Cashflows of each year of operations
5. An analysis of the profitability of the enterprise
6. A discussion of the sensitivity of the model to important parameters
Assume that the whole operation is financed by a one time loan of
150,000 from the hosp

ements, including answers and explanations

ons are reasonable and consistent with each other.

crucial for the validity of the outcome than others.

OC? WACC? Hurdle rate? Expected return?

first year, rises w inflation, rounded to nearest $

verage for plasma and cells; no inflation effect

from the hospital

Blood Bank case:

The collection center for blood donations is selling cells and plasma to its own hospital as well as others in th
The project is 10 years horizon.
Given assumptions:
Economic assumpions:

Overview:

Discount rate 7.55% per annum

8000 donations in the first year

Expected inflation 2,25% per annum

3 Phlebotomists in the first year

Depreciation method is Straight Line

1 Supervisor for max 5 phlebotomists

Price per unit sold 87*

Work hours for Ph & S - 5 days per week

Loan from the hospital $150 000

Opening times 50 weeks a year

* no inflation applied

18% downtime to uneven use

Costs: (subject to inflation)

Centrifuge assumptions:

Variable costs of collection bags $12 per bag

Centrifuge life 6 years

Gift to donors $10

Cost of Centrifuge $54 000

Cost per supervisor $1 700 per week

Capacity of Centrifuge 100 units per week

Cost per phlebotomist $1 000 per week

Overhead $4 000 per months
Overhead $4 per donation
Capacity:

Other assumptions:

phlebotomist per workday is 17

Delay in reimbursement 3 months

seats per phlebotomist 4*

Delay in payments 1 months

seats in donation area 31

Loss rate of donations : 15%*

* when on full capacity

* due to expiry and mishadnling

For the purposes of this exercise we have made the following assumptions:
Centrifuge makes 100 units per week, in 10 years thus we need 2 centrifuges to make 195 units
The loan of $150 000 is interest free
We have also calculated the maximum capacity including downtime, which is 13,94

al as well as others in the network.

Sales
Sales per week
Sales per day per 3 phleb
Sales per day per 1 phleb

1
8,000
160
32
10.67

2
8,194
164
33
10.93

3
8,389
168
34
11.19

4
8,583
172
34
11.44

3
1

3
1

3
1

3
1

Phlebotomist
Supervisor
Phleb Capacity Check

OK

Centrifuge
Capacity per week
Cost of Centrifuge
Deprec
Capacity Check

2
200
108,000
18,000
Ok

2
200

2
200

2
200

18,000
Ok

18,000
Ok

18,000
Ok

Wages
Phleb
Supervisor

150,000
85,000

153,375
86,913

156,826
88,868

160,355
90,868

OK

OK

OK

5
8,778
176
35
11.70

6
8,972
179
36
11.96

7
9,167
183
37
12.22

8
9,361
187
37
12.48

9
9,556
191
38
12.74

10
9,750
195
39
13.00

3
1

3
1

3
1

3
1

3
1

3
1

OK

OK

OK

2
200

2
200

18,000
Ok

163,962
92,912

OK

OK

OK

2
200

2
200

2
200

18,000
Ok

2
200
108,000
18,000
Ok

18,000
Ok

18,000
Ok

18,000
Ok

167,652
95,003

171,424
97,140

175,281
99,326

179,225
101,561

183,257
103,846

Centrifuge makes 100 units pe

13.94

Centrifuge makes 100 units per week, in 10 years we need 2 centrifuges to make 195 units

<- max capacity incl downtime

1
Assets
Current Assets
Trade receivables
Cash
PPE
First Cost
CY Depreciation
Accumulated Depr
PPE net
Total assets

147,900
31,617

151,495
128,046

155,090
221,065

158,684
308,896

162,279
389,495

108,000
(18,000)
0
90,000

108,000
(18,000)
(18,000)
72,000

108,000
(18,000)
(36,000)
54,000

108,000
(18,000)
(54,000)
36,000

108,000
(18,000)
(72,000)
18,000

269,517

351,540

430,154

503,581

569,774

Liabilities
Current Liabilities
Trade Payables
LT Debt
Loan

36,917

38,178

39,478

40,816

42,195

150,000

150,000

150,000

150,000

150,000

Retained earnings

82,600

163,362

240,677

312,765

377,579

269,517

351,540

430,154

503,581

569,774

Total liabilities and OE

Check!

For the Assets:

For Trade receivables, which is our Sales, we have divided the amount by 12
and multiplied by 3 because as per the Case assumptions the delay in
reimbursement is 3 months.
For the Liabilities:
For Trade payables we divide it by 12 as per Case assumptions delay in
payments is 1 month.
We assume Loan to be interest free

10

165,874
460,415

169,469
410,631

173,064
452,282

176,658
472,303

180,253
313,866

108,000
(18,000)
(90,000)
-

108,000
(18,000)
90,000

108,000
(18,000)
(18,000)
72,000

108,000
(18,000)
(36,000)
54,000

108,000
(18,000)
(54,000)
36,000

626,289

670,099

697,346

702,961

530,119

43,615

45,078

46,585

48,136

49,734

150,000

150,000

150,000

150,000

432,673

475,021

500,761

504,825

480,385

626,289

670,099

697,346

702,961

530,119

Sales
CoGS

591,600

605,979

620,358

634,738

649,117

Salary
Overhead
Gift to donors
Var Cost
Gross Profit
GM%

235,000
32,000
80,000
96,000
148,600
25.1%

240,288
33,515
83,788
100,546
147,842
24.4%

245,694
35,083
87,706
105,248
146,628
23.6%

251,222
36,703
91,758
110,110
144,944
22.8%

256,875
38,379
95,948
115,138
142,776
22.0%

Operating expenses:
Overhead
Depreciation

48,000
18,000

49,080
18,000

51,313
18,000

54,856
18,000

59,962
18,000

Operating income
Op Margin %

82,600
55.6%

80,762
54.6%

77,314
52.7%

72,088
49.7%

64,814
45.4%

Net income

82,600

80,762

77,314

72,088

64,814

Retained earnings

82,600

80,762

77,314

72,088

64,814

Income Statement

Profitability Analysis:
- The Blood Bank benefits greatly from being capitalized by a 0% interest rate
loan from the Hospital and having zero equity invested
- The Blood bank's profitability both from a GM% and from an OP Margin% basis
decreases over time, which is driven by the increase in inflation over time for
the Blood Bank's costs, but no corresponding increase in the sales price of
blood
- To ensure profitability the blood bank should insist that the price of blood paid
by the Hospital increases with inflation as well.

10

663,496

677,875

692,254

706,633

721,013

262,654
40,112
100,281
120,337
140,112
21.1%

268,564
41,904
104,759
125,711
136,938
20.2%

274,607
43,755
109,388
131,266
133,238
19.2%

280,785
45,669
114,173
137,007
128,999
18.3%

287,103
47,647
119,117
142,941
124,205
17.2%

67,018
18,000

76,590
18,000

89,498
18,000

106,935
18,000

130,644
18,000

55,094
39.3%

42,348
30.9%

25,740
19.3%

4,064
3.2%

(24,440)
-19.7%

55,094

42,348

25,740

4,064

(24,440)

55,094

42,348

25,740

4,064

(24,440)

80,762
18,000
(3,595)
1,261
96,429

77,314
18,000
(3,595)
1,299
93,019

Cash Flow Statement (Indirect)

Net income
Depreciation added
Trade Recievables
Trade Payables
Operating

82,600
18,000
(147,900)
36,917
(10,383)

Equipment
Investing

(108,000)
(108,000)

Loan
Financing

150,000
150,000

Cash at the beginning

Net Cash Flow
Cash at the end

31,617
31,617

31,617
96,429
128,046

128,046
93,019
221,065

72,088
18,000
(3,595)
1,339
87,832

64,814
18,000
(3,595)
1,379
80,599

55,094
18,000
(3,595)
1,420
70,920

221,065
87,832
308,896

308,896
80,599
389,495

389,495
70,920
460,415

42,348
18,000
(3,595)
1,463
58,216
(108,000)
(108,000)

460,415
(49,784)
410,631

25,740
18,000
(3,595)
1,507
41,652

4,064
18,000
(3,595)
1,552
20,020

410,631
41,652
452,282

452,282
20,020
472,303

10

(24,440)
18,000
(3,595)
1,598
(8,437)
(150,000)
(150,000)
472,303
(158,437)
313,866

80,762
18,000
(3,595)
1,261
96,429

77,314
18,000
(3,595)
1,299
93,019

Cash Flow Statement (Indirect)

Net income
Amortization added
Trade Recievables
Trade Payables
Operating

82,600
18,000
(147,900)
36,917
(10,383)

Equipment
Investing

(108,000)
(108,000)

Loan
Financing

150,000
150,000

Cash at the beginning

Net Cash Flow
Cash at the end
NPV

31,617
31,617

31,617
96,429
128,046

128,046
93,019
221,065

$2,013,099

NPV:
- The NPV of the project is positive at a 7.55% discount rate, so therefore the
managers of the blood bank should proceed with the project.
- However, the blood bank should be wary of the inflation issues that may
cause profitability to decrease as discussed in the I/S analysis.

herefore the

hat may

72,088
18,000
(3,595)
1,339
87,832

64,814
18,000
(3,595)
1,379
80,599

55,094
18,000
(3,595)
1,420
70,920

221,065
87,832
308,896

308,896
80,599
389,495

389,495
70,920
460,415

42,348
18,000
(3,595)
1,463
58,216
(108,000)
(108,000)

460,415
(49,784)
410,631

25,740
18,000
(3,595)
1,507
41,652

4,064
18,000
(3,595)
1,552
20,020

410,631
41,652
452,282

452,282
20,020
472,303

10

(24,440)
18,000
(3,595)
1,598
(8,437)
(150,000)
(150,000)
472,303
(158,437)
313,866

Sales
CoGS

591,600

619,614

648,589

678,554

709,539

Salary
Var Cost
Gross Profit
GM%

235,000
96,000
260,600
44.1%

240,288
100,546
278,780
45.0%

245,694
105,248
297,647
45.9%

251,222
110,110
317,221
46.7%

256,875
115,138
337,526
47.6%

Operating expenses:
Gift to donors
Overhead
Overhead
Depreciation

80,000
48,000
32,000
(18,000)

83,788
49,080
33,515
(18,000)

87,706
51,313
35,083
(18,000)

91,758
54,856
36,703
(18,000)

95,948
59,962
38,379
(18,000)

Operating income
Op Margin %

118,600
45.5%

130,397
46.8%

141,545
47.6%

151,904
47.9%

161,236
47.8%

Net income

118,600

130,397

141,545

151,904

161,236

Retained earnings

118,600

130,397

141,545

151,904

161,236

36,000

49,635

64,230

79,816

96,422

Income Statement

Monetary Increase
from the base case

Sensitivity Analysis:
- The biggest challenge to maintaining profitability for the blood bank over time
is the impact of inflation on costs but not on selling price.
- In this scenario we add an inflation adjuster to the price of blood, the result is
that the blood bank is able to maintain profitability over time.

10

741,574

774,693

808,926

844,308

880,872

262,654
120,337
358,584
48.4%

268,564
125,711
380,418
49.1%

274,607
131,266
403,053
49.8%

280,785
137,007
426,515
50.5%

287,103
142,941
450,828
51.2%

100,281
67,018
40,112
(18,000)

104,759
76,590
41,904
(18,000)

109,388
89,498
43,755
(18,000)

114,173
106,935
45,669
(18,000)

119,117
130,644
47,647
(18,000)

169,173
47.2%

175,166
46.0%

178,412
44.3%

177,738
41.7%

171,420
38.0%

169,173

175,166

178,412

177,738

171,420

169,173

175,166

178,412

177,738

171,420

114,079

132,818

152,672

173,674

195,859

Sales
CoGS

665,550

671,713

677,875

684,038

690,200

Salary
Var Cost
Gross Profit
GM%

235,000
108,000
322,550
48.5%

240,288
100,546
330,879
49.3%

245,694
105,248
326,933
48.2%

251,222
110,110
322,705
47.2%

256,875
115,138
318,187
46.1%

Operating expenses:
Gift to donors
Overhead
Overhead
Depreciation

90,000
48,000
36,000
(18,000)

90,833
49,080
36,333
(18,000)

91,667
51,313
36,667
(18,000)

92,500
54,856
37,000
(18,000)

93,333
59,962
37,333
(18,000)

Operating income
Op Margin %

166,550
51.6%

172,633
52.2%

165,287
50.6%

156,350
48.4%

145,559
45.7%

Net income

166,550

172,633

165,287

156,350

145,559

Retained earnings

166,550

172,633

165,287

156,350

145,559

Monetary Increase
from the base case

83,950

91,870

87,972

84,262

80,744

Income Statement

Sensitivity Analysis:
The increase in sales with increase just in variable and operational costs surely
gives the Blood bank significant increase in Net income and positive retained
earnings at the end of the project life.

10

696,363

702,525

708,688

714,850

721,013

262,654
120,337
313,372
45.0%

268,564
125,711
308,250
43.9%

274,607
131,266
302,815
42.7%

280,785
137,007
297,057
41.6%

287,103
142,941
290,969
40.4%

94,167
67,018
37,667
(18,000)

95,000
76,590
38,000
(18,000)

95,833
89,498
38,333
(18,000)

96,667
106,935
38,667
(18,000)

97,500
130,644
39,000
(18,000)

132,520
42.3%

116,660
37.8%

97,150
32.1%

72,789
24.5%

41,825
14.4%

132,520

116,660

97,150

72,789

41,825

132,520

116,660

97,150

72,789

41,825

77,426

74,313

71,410

68,725

66,264