Final Assignment

1. Would you rather have a savings account that pays 5% compounded semiannually or one that pays 5 percent compounded daily? Explain your answer.

2. Stillwater Hospital is borrowing $1,000,000 for its medical office building. The annual interest rate is 5%. What will be the monthly payments on the loan if the length of the loan is four years and payments occur at the end of each year? Show your work.

3. Lakeside Cancer Research Institute just received a $3 million gift to cover the salary for a permanent research scientist in perpetuity to study Hodgkin’s disease. What would be the required rate of return on the investment if the position paid an annual salary of $125,000? Show your work.

4. Consider the following uneven cash flow stream. What is the future value, if the opportunity cost rate is 6%? Show your work.

5. A wealthy philanthropist has established the following endowment for a hospital. The details are as follows: a cash deposit of $ 7 M two years from now; an annual cash deposit of $4M per year for the next five years. The first $4M will start today; at the end of 5 years, the hospital will also receive a lump sum payment of $18M. Assuming the cost of money is 3%, what is the value of this endowment in today’s dollars? Show your work.

6. Mercy Medical Mega Center, a tax paying entity, has made the decision to purchase a new laser surgical device. The device costs $500,000 and will be depreciated on a straight-line basis over five years to a zero salvage value. Mercy Medical could borrow the full amount at a12% rate for five years. The after-tax cost of debt equals 8%. Alternatively, it could lease the device for five years. The before tax lease payments per year would be $90,000. The tax rate is 35%. From a financial perspective, should Mercy lease the surgical device or borrow the money to purchase it? Show your work.

7. Blackmore Health System is considering a new orthopedic center. The building and equipment for the new center will cost $7M. The new orthopedic center expects to generate net operating cash flows of $500,000, $1.5 million, $ 3 million, $4.5 million and $5.5 million over the next five years. The cost of capital is 7%. Use the NPV and IRR approaches to determine if this project should be undertaken. Show your work.

8. The North Kingstown Cancer Infusion expects tremendous growth over the next year and is projecting the following cost and rate structure for the service. Revenues are $750 per patient. Rent is $3600 per month; staff cost is $195,000 per month; leases are $10,000 per month; other fixed costs are $20,000 per month; pharmaceuticals are $500 per patient; intravenous supplies are $25 per patient; and other patient supplies are $25 per patient. Show your work.

a. What volume of patients per month will it take for the center to breakeven?

b. If the center needs to make a profit of $75,000 per month, what is the new volume per month?

9. Consider the data in the table below for three independent health services organizations. Fill in the missing data indicated by question marks.

10. Discuss the role of strategic planning in the budgeting process. How does it differ from short-term planning?

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