Coral Bay Hospital

Answer

Coral Bay Hospital

Question #1: Base Case Scenario:

List all your assumptions (Base Case Scenario)

The base case scenario has the following assumptions;

That growth in the outpatient surgery market is as a result of rapid advancement in technology, aggressive approval of new minimal invasive surgery techniques by Medicare and that patients prefer outpatient surgeries for their convenient and low cost.  That competition has become intense as a result of completion in many areas of outpatient surgery.  That no competition will emerge immediately within the vicinity of the hospital despite the rumors to this effect.  That the current market price for the parcel of land owned by Coral Bay Hospital is $25,000 net of all fees, commission and taxes. 

That the surgery center building and the equipment to be used will both cost $10 million.  That both the building and equipment will fall into the MARCS (modified accelerated cost recovery system) five-year class for tax-depreciation purposes.  That the project will have a long life.  That the hospital uses market value of the building and equipment after 5 years to estimate the salvage value. 

That the expected volume is 20 procedures per day.  That the average charge per procedure is expected to be $1,500 with bad debts, charities, managed care plans and other allowances expected to lower the net patient revenue amount to $1,000.  That the center will be open five days a week, 50 weeks a year.  That the total labour costs to run the surgery center will be $918,000.  That utility’s will total to $50,000 annually.  That the cash overheads would increase by $36,000 annually.  That the administrative overhead allocation from the hospital current costs. 

That each procedure would consume $200 in expendable medical supplies.  That the hospital inventories and receivables would increase slightly in the center was built.  That the payable and accruals would also increase.  That the networking capital will have a small change that will not be material.  That both revenues and costs with the exception of depreciation will increase under a constant rate currently pegged at 3%.  That the outpatient surgery could siphon off up to $1 million in cash revenues annually.  That the reduction in volume could lead to $500,000 fall in annual cash expenses. 

That if surgery severity were high and managed care remained low the average revenue would be as high as $1,200.  When the converse is true, the revenues would fall to $800.  That if the real estate and medical equipment value stay strong, the building and equipment salvage value could be as high as $6 million and as low as $4 million should the converse hold true.

Include a spread showing depreciation each year

Using straight line depreciation, the annual depreciation expense will thus be;

Purchase price less salvage price divided by the number of years

($10,000,000 - $5,000,000) = $5,000,000; $5,000,000 / 5 = $1,000,000 annual depreciation expense.

Include a spread showing the Revenue model for next 5 years

Annual revenue = surgery center daily procedures volume x number of days x average charge per patient

Annual revenue = 20 x 250 x 1,000 = 5,000,000

Projected income statements (5years) for the surgery center

Projected cash Flows year-by-year

Question #2:  Best Case Scenario

Using straight line depreciation, the annual depreciation expense will thus be;

Purchase price less salvage price divided by the number of years

($10,000,000 - $5,000,000) = $5,000,000; $5,000,000 / 5 = $1,000,000 annual depreciation expense.

Include a spread showing the Revenue model for next 5 years

Annual revenue = surgery center daily procedures volume x number of days x average charge per patient

Annual revenue = 25 x 250 x 1,200 = 7,500,000

Projected income statements (5years) for the surgery center

Projected cash Flows year-by-year

QUESTION #3:

The three most important assumptions that need to be scrutinized and rationalized so the comfort factor with this project is high are;

The number of procedures per day, the average revenue per procedures and the administrative cost.  The number of procedures per day has a direct impact on the revenue generated by the surgery on a daily basis.  This is critical since the hospital chief of medicine projects an annual loss of up to $1,000,000 in cash revenue and $500,000 increase in annual cash expenses (Desivilya and Eizen, 2005). 

The next factor is the average revenue per procedure.  This has a direct effect on the surgery’s efficiency.  It is important that efficiency be pursued aggressively since it ensures that each dollar invested generates the maximum possible return (Deaves, Veit, Bhandari and Cheney, 2007).

Finally, will be the expected average net patient revenue.  This will be determined by the procedure performed and the amount of managed care penetration (Brown, Hyer and Ettenson, 2013).  The strategy will be to seek surgeries with high severity and low managed care so that the average revenue can the as high as possible (Desivilya and Eizen, 2005).  Conversely, when the reverse is the case, the revenue will be low (Hardy, 2004).