(2) Crunching the Numbers

You've got the numbers and need to explain how this investment will be worth it. You will have

to spend up front $2,000,000 to build a new OR and obtain equipment just to handle the

procedure and then pay another $200,000 per year to a physician who will perform the

procedure. You expect that it will take a while before the general public becomes aware of the

availability of the procedure, so it will take $40,000 the first year, and $10,000 each year after

that. For the sake of simplicity, assume that you will receive $1,000 from insurance for each

procedure. The first year you will have 400 procedures and it will grow by 200 procedures each

year.

Create the journal entries for each of the items above.

Use Excel to compute the following:

Using the payback method, how long will it take to recover the initial investment?

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As a non-profit hospital, how will you determine the hurdle rate?

If the hurdle rate is 10%:

0 What is the future value of the initial investment?

0 Assume the future value is the cost of everything you will pay out over the

five years, except for the initial investment. What is the present value?

o What is the IRR?

0 Should you invest? Why or why not?

o What if your insurance company lowers the rates it wishes to pay you? How

low could you go before it is no longer profitable after five years?