assignment 10

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Healthcare Financial Management and Economics

Week 10 Assignment — Capital Budgeting There are many options to buy capital, including cash purchases, loans, leasing, and other forms of payment. Your goal as a healthcare manager is to determine which method is best for your organization, given its financial and organizational structure (i.e., for-profit or not-for-profit). Time value of money and net present value are two techniques that may help you determine how and when to invest in new capital. For this Assignment, you examine these concepts as they pertain to the healthcare industry. To prepare for this Assignment: Review this week’s Learning Resources. Reflect on concepts of time value of money, net present value, internal rate of return, and purchasing options. The Assignment: Use the “Week 10 Assignment Capital Budget Excel Template” to show your work, answer the following questions:

1. If a physician deposits $24,000 today into a mutual fund that is expected to grow

at an annual rate of 8%, what will be the value of this investment:

a. 2 years from now

b. 4 years from now

c. 6 years from now

d. 8 years from now

2. The Chief Financial Officer of a hospital needs to determine the present value of

$120,000 investment received at the end of year 5. What is the present value if

the discount rate is:

a. 2%

b. 4%

c. 6%

d. 8%

3. Calexico Hospital plans to invest $1.6 million in a new MRI machine. The MRI will

be depreciated its 5-year economic life to a $200,000 salvage value. Additional

revenues attributed to the new MRI will be in the amount of $1.5 million per year

for 5 years. Additional operating expenses, excluding depreciation expense, will

amount to $1 million per year for 5 years. Over the life of the machine, net

working capital will increase by $30,000 over the life of the project.

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a. Assuming that the hospital is a non-profit entity, what is the project’s net

present value (NPV) at a discount rate of 8%, and what is the project’s

IRR?

b. Assuming that the hospital is a for-profit entity and the tax rate is 30%,

what is the project’s NPV at a cost of capital of 8%, and what is the

project’s IRR?

4. Marshall Healthcare System, a not-for-profit hospital, is planning on opening an

imaging center including MRI, x-ray, ultrasound, and CT. The new center will

generate $3 million per year in revenues for 5 years. Expected operating

expenses, excluding depreciation, would increase expenses by $1.2 million per

year over the life of the project. The initial capital investment outlay for the project

is $5 million, which will be depreciated on a straight line basis to a savage value.

The salvage value in year 5 is $800,000. The cost of capital for this project is

12%.

a. Compute the NPV in the IRR to determine the financial feasibility of the

project.

5. Penn Medical Center, a for-profit hospital, is considering the purchase of a new

64-slice CT scanner. The cost of the new scanner is $5 million and will be

depreciated over 10 years on a straight line basis to $0 savage value. The tax

rate is 40%. The financing options include either borrowing the full cost of the

scanner or leasing a scanner. The lease option is a 5-year lease with equal

before-tax lease payments of $950,000 per year. The borrowing alternative is a

5-year loan covering the entire cost of the scanner at an interest rate of 5%. The

after-tax cost of debt is 3%. Should Penn Medical lease the equipment or borrow

the money?