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Suppose that you have been hired by a potential investor to assess the adequacy of the cost forecasts that the PRIDE team developed. Assume the team has used a model of cost sources
like that in Figure 10-11.
The potential investor has asked you to address the following questions, in particular:
10-4. Which development expenses are likely to be:
a. The largest
b. The most difficult to estimate
c. Not included in Figure 10-11
10-5. Which operational expenses are likely to be:
a. The largest
b. The most difficult to estimate
c. Not included in Figure 10-11
10-6. Considering operational expenses,
a. Which operational costs depend upon the number of doctors and the frequency of their use, and which do not?
b. Which operational costs depend upon the number of patients and the frequency of their use, and which do not?
c. Which operational costs depend upon the number of health club users and the frequency of their use, and which do not?
d. How would a potential investor use answers to questions 10-6a–c for assessing the long-run costs if
PRIDE is successful?
10-7. Suppose Dr. Flores has told your investor that he is willing to hire Maggie and other experts as needed to
fully investigate any two sources of costs.
a. Of the cost sources in Figure 10-11, which two would you choose? Justify your choice.
b. List and describe criteria you would use for assessing the completeness and accuracy of the response.
10-8. Suppose you decide, using data that we do not yet have, that the PRIDE upside potential is large enough to justify the investment risk, if the cost estimates are accurate. They might be quite accurate, but then again,
they could be low by a factor of 3 or even 5. How would you advise the investor who hired you?
10-9. Suppose the investor who hired you tells you that you haven’t done your job if you can’t get closer than a
factor of 3 to 5 in your assessment of their cost assessment. How do you respond?
10-10. Assume that some of the costs are simply not knowable, by anyone, however skilled they are, at the time of the analysis. A good example is the cost of adapting PRIDE software to changes in healthcare law. Did you include any such costs in your answer to question 10-7? If so, are you wasting Maggie’s time and Dr. Flores’s money by asking them? How would you advise your investor to consider such costs?
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