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. Chapter 13: Exercises 13-1 through 13-3 (page 269 of the text)

· 13-1 A representative of a reputable financial services company has approached you as manager of a four-person group of anesthesiologists with an opportunity to purchase a 10-year annuity due for each member of the group. The annuity due would pay $40,000 each year beginning 5 years from now (i.e., at time = 5). What is the most you would be willing to pay now, per each physician, for this investment? Assume an appropriate discount rate of 7%.

Solution:

4 person hence per person 10000

Hence at present per person to be paid =10000/ (1+0.07) ^4 =7628.95

As annuity is due at start of 5th year that is end of 4rth year

So the most you would be willing to pay per person is $7628.95 right now

· 13-2 The hospital’s marketing and finance departments have just provided you, as chief financial officer, with pro forma income statements for your proposed sonogram center. These statements appear in the following. Pro forma Income Statement (000)

Time	t + 1	t + 2	t + 3	t + 4
Service Revenues (net)	$425	$500	$580	$700
Expenses	$400	$450	$525	$600
Depreciation Expense	$ 35	$ 35	$ 35	$ 35
Net Income	($ 10)	$ 15	$ 20	$ 65

· What is the project’s IRR? Assume an initial investment of $175,000 and an appropriate discount rate of 6%. The hospital is operated as a not-for-profit facility.

· 13-3 The chief operating officer (COO) of a small, not-for-profit community hospital has to make a recommendation to the board of trustees on choosing among three project options for an unrestricted gift of $250,000 that has just been received. The board has established a time horizon of 5 years on this project. The options are described in the following.

· a. Purchase a 5-year treasury note at an interest rate (annual) of 7%.

· b. Purchase the practice of a young physician (the hospital’s third highest admitter). Estimates of projected cash flows for the practice (post-purchase), are: Probability of Cash Flow

Time	60%	20%	20%
t + 1	$ 40,000	$20,000	$ 60,000
t + 2	$ 60,000	$30,000	$ 80,000
t + 3	$  75,000	$40,000	$100,000
t + 4	$100,000	$50,000	$125,000
t + 5	$100,000	$50,000	$125,000

· c. Purchase an upgraded analyzer for the laboratory. Based on forecasts of laboratory utilization, the net cash flows for this project are:

Time	Net Cash Flow
t + 1	$75,000
t + 2	$75,000
t + 3	$50,000
t + 4	$50,000
t + 5	$50,000

· Which investment should the COO recommend and why?

I have done 13-1..I want answers of all parts of 13-2