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MMHA 6400 Healthcare Financial Management And Economics
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MMHA 6400 Healthcare Financial Management And Economics
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Course Code: MMHA6400
University: Walden University
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Country: United States
Question:
Calexico Hospital plans to invest in a new MRI machine. The cost of the MRI is $1.4 million. The MRI has an economic life of 5 years, and it will be depreciated over a five-year 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 per year for 5 years.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 IRRb. 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 IRR4. 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 $4 million per year in revenues for 5 years. Expected operatingexpenses, excluding depreciation, would increase expenses by $1.2 million per year for the next 5 years. The initial capital investment outlay for the project is $5.5 million, which will be depreciated on a straight line basis to a savage value.
The savage value in years 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. 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 $4 million and will bedepreciated 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 five-year lease with equalbefore-tax lease payments of $975,000 per year. The borrowing alternative is a five-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 orborrow the money.
Answer:
Problem 1
A
B
C
D
Future
Future
Present
Value
Value
Future
Value
Factor
Factor
Value
a)
$19,000
1.08
1.2597
$23,935
b)
$19,000
1.08
1.5869
$30,151
c)
$19,000
1.08
1.9990
$37,981
d)
$19,000
1.08
2.5182
$47,845
Problem 2
A
B
C
D
Present
Present
Future
Value
Value
Present
Value
Factor
Factor
Value
a)
$1,40,000
0.970873786
0.862609
$1,20,765
b)
$1,40,000
0.943396226
0.747258
$1,04,616
c)
$1,40,000
0.917431193
0.649931
$90,990
d)
$1,40,000
0.892857143
0.567427
$79,440
Problem 3
a)
b)
IRR
IRR
Year
Cash Flow
Cummulative Cash Flow
Year
Cash Flow
Cummulative Cash Flow
Year 0
$ (14,00,000)
$ (14,00,000)
Year 0
$(14,00,000)
$ (14,00,000)
Year 1
$ 4,70,000
$ (9,30,000)
Year 1
$ 3,92,000
$ (10,08,000)
Year 2
$ 4,70,000
$ (4,60,000)
Year 2
$ 3,92,000
$ (6,16,000)
Year 3
$ 4,70,000
$ 10,000
Year 3
$ 3,92,000
$ (2,24,000)
Year 4
$ 4,70,000
$ 4,80,000
Year 4
$ 3,92,000
$ 1,68,000
Year 5
$ 6,70,000
$ 11,50,000
Year 5
$ 5,32,000
$ 7,00,000
IRR=
22.63%
IRR=
14.53%
NPV=
$ 5,67,306
NPV=
$ 2,41,133
Problem 4
Year
Cash Flow
Cummulative Cash Flow
Year 0
$ (55,00,000)
$ (55,00,000)
Year 1
$ 28,00,000
$ (27,00,000)
Year 2
$ 28,00,000
$ 1,00,000
Year 3
$ 28,00,000
$ 29,00,000
Year 4
$ 28,00,000
$ 57,00,000
Year 5
$ 36,00,000
$ 93,00,000
IRR=
43.61%
NPV=
$ 45,06,531
As the NPV is positive and IRR is higher than the cost of capital, the project should be accepted.
Problem 5
What is the payback period for problem 3?
a)
Payback period = Year before recovery + Year before cummulative cash flow/cash flow for year paid off
Payback period (show calculation) =
Year 2 + ($4,60,000/$4,70,000)
Payback period (show answer)=
2.98
yrs.
b)
Payback period = Year before recovery + Year before cummulative cash flow/cash flow for year paid off
Payback period (show calculation) =
Year 3 + ($2,24,000/$3,92,000)
Payback period (show answer)=
3.57
yrs.
Year
Lease Option
Borrowing Option
Initial Cost
$ 40,00,000
$ 40,00,000
Year 1
$ (5,85,000)
$ (1,20,000)
Year 2
$ (5,85,000)
$ (1,20,000)
Year 3
$ (5,85,000)
$ (1,20,000)
Year 4
$ (5,85,000)
$ (1,20,000)
Year 5
$ (5,85,000)
$ (41,20,000)
Additional Payment/(Savings)
$ (10,75,000)
$ 6,00,000
The annual cash flow for lease option is higher than the borrowing option, except the last year of payment. However, from the calculations above, it is clear that for lease options, the hospital would get higher tax benefit than the borrowing options and thus, it can decrease its cash outflows. Therefore Penn Medical should lease the equipment.
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