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May 30, 2023

Adjusting for Risk: Evaluating Investment Strategies in Healthcare In the realm of healthcare investments, astute decision-making is paramount. Considering two investment options, a diligent assessment of their projected cash flows is imperative. Investment One entails an initial outlay of -$150,000, with subsequent cash flows spanning over six years. Conversely, Investment Two necessitates an initial investment of -$100,000, with returns accruing over a similar period. Employing a discount rate of 5%, we embark on a comparative analysis to ascertain the optimal investment avenue. Initially, without factoring in risk differentials, Investment Two emerges as the preferred choice due to its higher net present value (NPV) at the given discount rate. However, upon incorporating a 3% annual inflation rate into our analysis, the NPV of both investments is recalibrated to reflect the diminishing value of future cash flows. Lastly, should Investment One pose a higher risk profile compared to Investment Two, adjustments to the discount rate would be warranted to account for this increased risk. By employing a higher discount rate reflective of the elevated risk, a more conservative approach to valuation is adopted, potentially altering the investment preference. This holistic evaluation, elucidated through a comprehensive spreadsheet and accompanying written report, offers insights into strategic investment decision-making within the healthcare domain.

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