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.
You are required to:
Prepare an Excel document that shows the projected cash flows and the NPV, IRR, and payback period calculations.
Prepare a single spaced report to the hospital’s board explaining whether they should proceed with opening this unit. Use NPV, IRR and payback period as the basis for your recommendation. Be sure to explain all of your assumptions. In a practical sense, there are many factors that are missing that should be considered in this decision. Devote a third of your report to highlight any factors that may affect the cash flow calculations.
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