Healthcare Financial Management

and Economics

Week 10 Assignment â 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 weekâs Learning Resources. Reflect on concepts of time value

of money, net present value, internal rate of return, and purchasing options.

The Assignment:

Use theâWeek 10 Assignment Capital Budget Excel Templateâ

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.

a.

Assuming

that the hospital is a non-profit entity, what is the projectâs net present

value (NPV) at a discount rate of 8%, and what is the projectâs IRR?

b.

Assuming

that the hospital is a for-profit entity and the tax rate is 30%, what is the

projectâs NPV at a cost of capital of 8%, and what is the projectâs 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?

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