Assume that you are the CFO of a non-tax paying hospital that is considering ope
ID: 2762675 • Letter: A
Question
Assume that you are the CFO of a non-tax paying hospital that is considering opening a pediatric unit. Based on your research, you expected the following: The cost of new equipment for the unit is $4 million. The equipment has a 10 year useful life and can be sold for $500K at the end of 10 years. (Assume straight line depreciation) The staffing cost for the unit is as follows: 3 doctors @ an average annual salary of $250K each 6 nurses @ an average annual salary of $70K each 1 administrative assistant with an annual salary of $40K A salary increase of 4% is given each year. Employee benefits are 35% of salaries Other operating expenses are projected at $2.75 million per year and are expected to increase by 5% each year. The average revenue collected from each patient encounter is $650. In the first year, this unit is expected to have 8,000 patient encounters. Patient encounters are expected to grow by 2% each year in years 2-4 and 4% each year in years 5-7 and 5% each year in years 8-10. The required rate of return is 10%. The required payback period is 7 years.
Explanation / Answer
The cost of new equipment 4,000,000 Years 1 2 3 4 5 6 7 8 9 10 Total Useful life (Years) 10 No. of Patient 8,000 8,160 8,323 8,490 8,829 9,182 9,550 10,027 10,529 11,055 Salvage value 500,000 Revenue per patient 650 650 650 650 650 650 650 650 650 650 Deprciation SLM Total Revenue -(A) 5,200,000 5,304,000 5,410,080 5,518,282 5,739,013 5,968,573 6,207,316 6,517,682 6,843,566 7,185,745 Staffing cost: 3 doctors@250K 750,000 Expenses: 6 Nurses@70K 420,000 Salary 1,210,000 1,258,400 1,308,736 1,361,085 1,415,529 1,472,150 1,531,036 1,592,277 1,655,969 1,722,207 1 Administrative assistant@40K 40,000 Employee Benefits 423,500 440,440 458,058 476,380 495,435 515,253 535,863 557,297 579,589 602,773 Increase in salary 4% Other operating expense 2,750,000 2,887,500 3,031,875 3,183,469 3,342,642 3,509,774 3,685,263 3,869,526 4,063,002 4,266,153 Employee Benefits 35% of salaries Other Opearting expenses 2,750,000 Total Expenses-(B) 4,383,500 4,586,340 4,798,669 5,020,934 5,253,606 5,497,177 5,752,162 6,019,101 6,298,560 6,591,132 Increase 5% Average revenue per patient 650 Net Income (A)-(B) 816,500 717,660 611,411 497,348 485,407 471,397 455,155 498,581 545,006 594,612 No. of patient 8,000 Discount factor@10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 Growth in patient: Present value 742,273 593,107 459,362 339,695 301,399 266,091 233,566 232,592 231,136 229,249 3,628,471 2-4' 2% Add: PV of salvage 500000*.386 193,000 5-7' 4% Less: Initial Outlay 4,000,000 8-10' 5% Required return 10% Net Present value -178,529 Due to negative NPV opening padiatric unit is not beneficial and should abond this project.