Coral Bay Hospital Questions

1.Should Coral Bay Hospital Build an off premise ambulatory outpatient surgery center?

Why or why not?

Assume Coral’s cost of capital at 14%.

Show all dollars figures in thousands of dollars with one decimal point

• Include in your analysis the following:

1. List all your assumptions (Base Case Scenario). (1page)
2. Include a spread showing depreciation each year (1page).
3. Include a spread showing the Revenue model for next 5 years. (1page).
4. Projected income statements (5years) for the surgery center. (1page)
5. Projected cash Flows year-by-year (1page)
6. Include decision parameters such as IRR, NPV and Pay-back period

Average revenue per procedure

Salvage value (after 5 years) –building & equipment.

All other assumptions are same as the base Case scenario.

Calculate questions 1a to 1f assuming Best Case Scenario

In light of this, what are the “key” assumptions that need to be scrutinized and rationalized, so the “comfort factor” with this project is high?

Identify 3 such most important assumptions in your analysis.

Briefly state why these are 3 most important ones.

                                                       SAMPLE SOLUTION

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.