Reference no: EM132514029

St. Helpinus Hospital is considering the purchase of a new Wizbang machine. The current Wizbang machine is 15 years old and will be donated to a hospital if a new one is purchased.

The goal of this exercise is to determine some key financial management metrics that will inform your decision whether or not to purchase the new machine.

Data:

Cost of a new Wizbang machine $250,000

Cost of capital 8%

Life of the new machine 5 years

Fixed cost per procedure on the new machine $10.50 per procedure

Expected/Budgeted # of procedures per year 20,000

Profit goal for the first year $36,800

Present Value factors Use table on page 408 - table 18-4

Payer Mix & Reimbursement Rates Medicare - 60% - $50/procedure

Medicaid - 30% - $48/procedure

Self Pay - 10% - $120/ procedure

Formulas:

Break Even Cost of machine + fixed cost(# procedures)

Price/cost per procedure

Historical Depreciation Purchase Price

Depreciation Life

Replacement Depreciation Current Value

Depreciation Life

Cost/Price Variance (Actual Cost or Price - Budgeted Cost or Price)*Actual Volume

Effective Interest Rate (1+(i/n))to the nth power - 1

Profitability Index Net Present Value

Cost of item

Net present Value (NPV) of cash flow

Present value of cash flow - cost

Present value of cash flow = (cash flow* factor from table 18-4; based on interest rate and time)

Problem 1: What is the Profitability Index of the purchase?

Problem 2: What is the present value of the cash flow given the data on the data sheet?

Problem 3: The Wizbang machine has a cost of $250,000. The payer mix is on the data sheet.

It is expected that there will be 20,000 procedures per year at an average charge of $130 per procedure.

What is the projected net cash flow for the five year life of the machine?

Problem 4: What is the effective interested rate if the purchase payments are compounded monthly?