A surgery center specializes in high-risk cardiovascular surgery. The center needs to forecast its profitability over the next three years to plan for capital growth projects. For the first year, the hospital anticipates serving 1,400 patients, which is expected to grow by 9% per year. Based on current reimbursement formulas, each patient provides an average billing of $120,000, which will grow by 3% each year. However, because of managed care, the center collects only 25% of billings. Variable costs for supplies and drugs are calculated to be 10% of billings. Fixed costs for salaries, utilities, and so on will amount to $20,000,000 in the first year and are assumed to increase by 6% per year. Develop a spreadsheet model to predict the net present value of profit over the next three years. Use a discount rate of 4%.

A surgery center specializes in high-risk cardiovascular surgery. The center needs to forecast its profitability over the next three years to plan for capital growth projects. For the first year, the hospital anticipates serving 1,400 patients, which is expected to grow by 9% per year. Based on current reimbursement formulas, each patient provides an average billing of $120,000, which will grow by 3% each year. However, because of managed care, the center collects only 25% of billings. Variable costs for supplies and drugs are calculated to be 10% of billings. Fixed costs for salaries, utilities, and so on will amount to $20,000,000 in the first year and are assumed to increase by 6% per year. Develop a spreadsheet model to predict the net present value of profit over the next three years. Use a discount rate of 4%.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 4CE: Manzer Enterprises is considering two independent investments: A new automated materials handling...

See similar textbooks

Similar questions

Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?
A restaurant is considering the purchase of new tables and chairs for their dining room with an initial investment cost of $515,000, and the restaurant expects an annual net cash flow of $103,000 per year. What is the payback period?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
ABC Medical has invested RM2 million in a Health Diagnostic Support system. To maintain the system, the hospital has to pay the vendor RM10,000 monthly for monitoring and support activities. The system is projected to increase the hospital revenue by RM50,000 monthly. If the system is to be utilized by the hospital for 10 years, calculate the rate of return of the investment using ROI.
An engineering firm estimates that its cost for employer sponsored health insurance will be $750,000 next year and increase at 11% per year for the next 5 years. The company CFO wants to budget a uniform amount each year to cover these costs. If the firm's rate of return is 6% per year, how much should be invested each year for employer sponsored health care? Express your answer in $ to the nearest $1,000.
You are the financial manager of the firm LAB.inc which does research in the medical field, your company needs an estimate of a financing plan for a research project. The research project according to the evaluation of the experts will be spread over a period of 4 years. The annual funding required to conduct this research is $100,000 at the beginning of each year. The firm has set a term of 7 years to raise the necessary funds to finance this research, the nominal interest rate is 8% capitalized quarterly. 1. How much does the company need to save at the end of each month to fund this research in 7 years? 2. Draw the timeline for this financing plan by presenting all the relevant elements. If the firm wants to start financing the research project today t=0, by taking out a bank loan equal to the VA of all the financing needs of the research project (for the 4 years). 3. Calculate the amount of monthly payments that the firm must pay to repay this bank loan for a period of 5 years?
South Hampton University is preparing its budget for the upcoming academic year. This is a specialised private university that charges fees for all degree courses. Currently, 30,000 students are enrolled on campus. However, the university is forecasting a 5 per cent growth in student numbers in the comingyear, despite an increase in fees to $2,000 per subject. The following additional information has beengathered from an examination of university records and conversations with university managers:South Hampton is planning to award scholarships to 200 students, which will cover their fees. The average class has 80 students, and the typical student takes 4 subjects per semester. SouthHampton operates 2 semesters per year.The average academic staff salary is $220,000 per annum including on-costs. South Hampton’s academic staff are evaluated on the basis of teaching, research, administrationand professional/community service. Each of the academic staff teaches the equivalent of…
MHA Medical Center is starting a new lab test center on its third floor. The expected patient volume demands will generate $500,000 per year in revenues for the next five years. The new center will incur operating expenses, excluding depreciation, of $300,000 per year for the next five years. The initial cost of the new equipment is $700,000. Straight-line depreciation is used to estimate depreciation expense, and the equipment will be depreciated over a five-year life to their salvage value. The expected salvage value of the equipment at year five is $80,000. Compute the NPV (at 10 percent cost of capital) and IRR to determine the financial feasibility of this project if this were a tax-paying entity with a tax rate of 30 percent. Use the following tables. * LOOK at Image Givens: Years 0 1 2 3 4 5 Initial investment $0 $0 Net revenue $0 $0 $0 $0 $0 Operating expenses…
The staff of ProHealth Medical Services has established the following net cash flows for a food services operation that may open in its outpatient clinic. Year Expected Net Cash Flow 0 ($100,000) 1 40,000 2 40,000 3 40,000 4 40,000 5 40,000 5 (Salvage Value) 30,000 The time 0 cash flow is the net investment outlay, while the final amount is the terminal cash flow. The clinic is expected to move to a new building in five years. All other flows represent net operating cash flows ProHealth’s corporate cost capital is 10% a. What is the projects IRR? b. Assuming the project has average risk, what, is its NPV? c. Now, assume that the operating cash flows in years 1 through 5 could be as low as 30,000 or as high as $50,000. Furthermore, the salvage value cash flow at the end of year 5 could be as low as $0 or as high as $40,000. What are the worst-case and best-case IRRS? The worst-case and best-case NPVs?
Your department is choosing between two technology projects to launch in the upcoming quarter. Project A requires an immediate $600,000 investment and will generate $120,000 in net revenue at the end of year 1 and for eight more years (nine total) after that. Project B requires an immediate investment of $400,000 and another $300,000 at the end of year 1, with net revenues of $220,000 at the end of years 2, 3, 4, 5, and 6. The company's calculated discount rate for major initiatives is 13% per year. From a Net Present Value perspective, which of the two projects is most attractive financially? Show all work for full/partial credit.
Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $560,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $400,000 (also in today's dollars) over that same time period. An initial cash investment of $220,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $70,000. Ken Allen should recommend that the company: (Select the best answer below) a. to not replace the existing robotics because the net profit is positive b. replace the existing robotics because the net profit is positive Other factors that should be considered before the final decision is made are: (Choose all that apply A. What will the energy consumption of the new robotics. B.Make sure sunk costs are included. C.Whether even…
Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing therobotics used on the heavy truck gear line will produce total benefits of $516,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $387,000 (also in today's dollars) over that same timeperiod. An initial cash investment of $206,400 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $72,000. Show how Ken will apply marginal cost-benefit analysis What should Ken recommend that the company do? Why?A. Replace the existing robotics because the net profit is negative.B. do not replace the existing robotics because the net profit is negative. What factors besides the costs and benefits should be considered before the final decision is made? Other factors that should be considered before the final decision is made are:…