Mercadia Hospital, a not-for-profit entity, is preparing to build a satellite em
ID: 2466988 • Letter: M
Question
Mercadia Hospital, a not-for-profit entity, is preparing to build a satellite emergency department on land it owns 10 miles from the hospital site. Based on a $50,000 planning study, Mercadia believes there is sufficient demand for the project. Prepare a five year cash flow analysis.
The project will be built on land that Mercadia purchased for $150,000 but now has a market value of $500,000. Building and fixed equipment (average useful life of 20 years) will be $10,000,000 and major moveable equipment (average useful life of 5 years) will cost $5,000,000. We'll assume that these outflows occur at the end of Year 0.
Volume will ramp up over a three year period. In Year 1, visits are projected at 15,000 rising to 25,000 in Year 2 and then to 30,000 in Years 3-5. Payer mix is assumed to be 45% private pay, 25% Medicare, and 15% each for Medicaid and Uninsured. Private payers reimburse the hospital $1,400 per visit, Medicare pays $850, Medicaid $640 and uninsured patients average $550.
Salary expense will be $9,000,000 in Year 1, $10,000,000 in Year 2 and $12,000,000 in Years 3-5. Fringe benefits are 25% of salaries. Supplies and other expenses (which include maintenance and overhead expenses) are a mix of fixed and variable costs. The fixed costs are estimated at $3,000,000 per year while the variable costs are $325 per visit.
Inflation, which has been about 2%, is assumed to affect revenues and expenses equally. The impact on the hospital's existing emergency room volume is expected to be negligible. Management believes that there will be a slight increase in accounts receivable that will be offset by an equal increase in accounts payable.
The projections will only go out to the end of Year 5 but management believes that there will be no changes beyond that point.
Explanation / Answer
Calculation of Cash Flows:
Year
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Number of Visits
15000
25,000
30,000
30,000
30,000
Building and fixed equipment
(10,000,000)
Moveable equipment
(5,000,000)
Collection from Private payers
9,450,000
15,750,000
18,900,000
18,900,000
18,900,000
(Calculations)
(15000*45%*$1400)
(25000*45%*$1400)
(30000*45%*$1400)
(30000*45%*$1400)
(30000*45%*$1400)
Collection from Medicare pays
3,187,500
5,312,500
6,375,000
6,375,000
6,375,000
(Calculations)
(15000*25%*$850)
(25000*25%*$850)
(30000*25%*$850)
(30000*25%*$850)
(30000*25%*$850)
Collection from Medicaid
1,440,000
2,400,000
2,880,000
2,880,000
2,880,000
(Calculations)
(15000*15%*$640)
(25000*15%*$640)
(30000*15%*$640)
(30000*15%*$640)
(30000*15%*$640)
Collection from uninsured patients
1,237,500
2,062,500
2,475,000
2,475,000
2,475,000
(Calculations)
(15000*15%*$550)
(25000*15%*$550)
(30000*15%*$550)
(30000*15%*$550)
(30000*15%*$550)
Payment of Salary Expense
(9,000,000)
(10,000,000)
(12,000,000)
(12,000,000)
(12,000,000)
Payment of Fringe benefits
(2,250,000)
(2,500,000)
(3,000,000)
(3,000,000)
(3,000,000)
(Calculations)
(9000000*25%)
(10000000*25%)
(12000000*25%)
(12000000*25%)
(12000000*25%)
Payment of Fixed Supplies and other expenses
(3,000,000)
(3,000,000)
(3,000,000)
(3,000,000)
(3,000,000)
Payment of Variable Supplies and other expenses
(4,875,000)
(8,125,000)
(9,750,000)
(9,750,000)
(9,750,000)
(Calculations)
(15000*325)
(25000*325)
(30000*325)
(30000*325)
(30000*325)
Cash Flows (Sum of Above)
(15,000,000)
(3,810,000)
1,900,000
2,880,000
2,880,000
2,880,000
Calculation of Cash Flows:
Year
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Number of Visits
15000
25,000
30,000
30,000
30,000
Building and fixed equipment
(10,000,000)
Moveable equipment
(5,000,000)
Collection from Private payers
9,450,000
15,750,000
18,900,000
18,900,000
18,900,000
(Calculations)
(15000*45%*$1400)
(25000*45%*$1400)
(30000*45%*$1400)
(30000*45%*$1400)
(30000*45%*$1400)
Collection from Medicare pays
3,187,500
5,312,500
6,375,000
6,375,000
6,375,000
(Calculations)
(15000*25%*$850)
(25000*25%*$850)
(30000*25%*$850)
(30000*25%*$850)
(30000*25%*$850)
Collection from Medicaid
1,440,000
2,400,000
2,880,000
2,880,000
2,880,000
(Calculations)
(15000*15%*$640)
(25000*15%*$640)
(30000*15%*$640)
(30000*15%*$640)
(30000*15%*$640)
Collection from uninsured patients
1,237,500
2,062,500
2,475,000
2,475,000
2,475,000
(Calculations)
(15000*15%*$550)
(25000*15%*$550)
(30000*15%*$550)
(30000*15%*$550)
(30000*15%*$550)
Payment of Salary Expense
(9,000,000)
(10,000,000)
(12,000,000)
(12,000,000)
(12,000,000)
Payment of Fringe benefits
(2,250,000)
(2,500,000)
(3,000,000)
(3,000,000)
(3,000,000)
(Calculations)
(9000000*25%)
(10000000*25%)
(12000000*25%)
(12000000*25%)
(12000000*25%)
Payment of Fixed Supplies and other expenses
(3,000,000)
(3,000,000)
(3,000,000)
(3,000,000)
(3,000,000)
Payment of Variable Supplies and other expenses
(4,875,000)
(8,125,000)
(9,750,000)
(9,750,000)
(9,750,000)
(Calculations)
(15000*325)
(25000*325)
(30000*325)
(30000*325)
(30000*325)
Cash Flows (Sum of Above)
(15,000,000)
(3,810,000)
1,900,000
2,880,000
2,880,000
2,880,000