Help explain financial decision making
Category: Finance
Better Care Clinic Breakeven Analysis
Case 4
Better Care Clinic
(Breakeven Analysis)
Fairbanks Memorial Hospital, an acute care hospital with 300 beds and 160 staff physicians, is one of 75 hospitals owned and operated by Health Services of America, a for-profit, publicly owned company. Although there are two other acute care hospitals serving the same general population, Fairbanks historically has been highly profitable because of its well-appointed facilities, fine medical staff, and reputation for quality care. In addition to inpatient services, Fairbanks operates an emergency room within the hospital complex and a stand-alone walk-in clinic, the Better Care Clinic, located about two miles from the hospital.
Todd Greene, Fairbanks’s chief executive officer (CEO), is concerned about Better Care Clinic’s financial performance. About ten years ago, all three area hospitals jumped onto the walk-in-clinic bandwagon, and within a short time, there were five such clinics scattered around the city. Now, only three are left, and none of them appears to be a big money maker. Todd wonders if Fairbanks should continue to operate its clinic or close it down.
The clinic is currently handling a patient load of 45 visits per day, but it has the physical capacity to handle more visits—up to 60 a day. Todd has asked Jane Adams, Fairbanks’s chief financial officer, to look into the whole matter of the walk-in clinic. In their meeting, Todd stated that he visualizes two potential outcomes for the clinic: (1) the clinic could be closed or (2) the clinic could continue to operate as is.
As a starting point for the analysis, Jane has collected the most recent historical financial and operating data for the clinic, which are summarized in Table 1. In assessing the historical data, Jane noted that one competing clinic had recently (December 2021) closed its doors. Furthermore, a review of several years of financial data revealed that the Fairbanks clinic does not have a pronounced seasonal utilization pattern.
Next, Jane met several times with the clinic’s director. The primary purpose of the meetings was to estimate the additional costs that would have to be borne if clinic volume rose above the current January/February average level of 45 visits per day. Any incremental volume would require additional expenditures for administrative and medical supplies, estimated to be $4.00 per patient visit for medical supplies, such as tongue blades, rubber gloves, bandages, and so on, and $1.00 per patient visit for administrative supplies, such as file folders and clinical record sheets.
Although the clinic has the physical capacity to handle 60 visits per day, it does not have staffing to support that volume. In fact, if the number of visits increased by 11 per day, another part-time nurse and physician would have to be added to the clinic’s staff. The incremental costs associated with increased volume are summarized in Table 2.
Jane also learned that the building is leased on a long-term basis. Fairbanks could cancel the lease, but the lease contract calls for a cancellation penalty of three months’ rent, or $37,500, at the current lease rate. In addition, Jane was startled to read in the newspaper that Baptist Hospital, Fairbanks’s major competitor, had just bought the city’s largest primary care group practice, and Baptist’s CEO was quoted as saying that more group practice acquisitions are planned. Jane wondered whether Baptist’s actions should influence the decision regarding the clinic’s fate.
Finally, in earlier conversations, Todd also wondered if the clinic could “inflate” its way to profitability; that is, if volume remained at its current level, could the clinic be expected to become profitable in, say, five years, solely because of inflationary increases in revenues? Overall, Jane must consider all relevant factors—both quantitative and qualitative—and come up with a reasonable recommendation regarding the future of the clinic.
Table 1
Better Care Clinic
Historical Financial Data
Daily Averages
CY 2021 Jan/Feb22
Number of visits 41 45
Net revenue $1,524 $1,845
Salaries and wages $ 428 $ 451
Physician fees 533 600
Malpractice insurance 87 107
Travel and education 15 0
General insurance 22 28
Utilities 41 36
Equipment leases 4 5
Building lease 400 417
Other operating expenses 288 300
Total operating expenses $1,818 $1,944
Net profit (loss) ($ 294) ($ 99)
Table 2
Better Care Clinic
Incremental Cost Data
Variable Costs:
Medical supplies $4.00 per visit
Administrative supplies 1.00
Total variable costs $5.00 per visit
Semifixed Costs:
Salaries and wages $ 100
Physician fees 267
Total daily semifixed costs $ 367
Note: The semifixed costs are daily costs that apply when volume increases by 11 visits above the current level of 45. However, the physical capacity of the clinic is only 60 visits per day.
QUESTIONS
- Using the historical data as a guide, construct a pro forma (forecasted) profit and loss statement for the clinic’s average day for all of 2022, assuming the status quo. With no change in volume (utilization), is the clinic projected to make a profit?
- How many additional daily visits must be generated to break even?
- Thus far, the analysis has considered the clinic’s near-term profitability, that is, an average day in 2022. Redo the forecasted profit and loss statement developed in Question 1 for an average day in 2027, five years hence, assuming that volume stays constant (does not increase). (Hint: You must consider likely changes in revenues and costs due to inflation and other factors. The idea here is to see if the clinic can “inflate” its way to profitability even if volume remains at its current level.)
- Suppose you just found out that the $3,210 monthly malpractice insurance charge is based on an accounting allocation scheme that divides the hospital’s total annual malpractice insurance costs by the total annual number of inpatient days and outpatient visits to obtain a per episode charge. Then, the per episode value is multiplied by each department’s projected number of patient days or outpatient visits to obtain each department’s malpractice cost allocation. What impact does this allocation scheme have on the clinic’s true (cash) profitability? (No calculations are necessary.)
- Does the clinic have any value to the hospital beyond that considered by the numerical analysis just conducted? Do the actions by Baptist Hospital have any bearing on the final decision regarding the clinic?
- What is your final recommendation concerning the future of the walk-in clinic? What is your justification for your recommendation?
Twin Falls Community Hospital Capital Investment Analysis
Case 5
Twin Falls Community Hospital (Capital Investment Analysis)
Twin Falls Community Hospital is a hypothetical 250-bed, not-for-profit hospital located in the city of Twin Falls, the largest city in Idaho’s Magic Valley region and the seventh largest in the state. The hospital was founded in 1972 and today is acknowledged to be one of the leading healthcare providers in the area.
Twin Falls’ management is currently evaluating a proposed ambulatory (outpatient) surgery center. Over 80 percent of all outpatient surgery is performed by specialists in gastroenterology, gynecology, ophthalmology, otolaryngology, orthopedics, plastic surgery, and urology. Ambulatory surgery requires an average of about one and one-half hours; minor procedures take about one hour or less, and major procedures take about two or more hours. About 60 percent of the procedures are performed under general anesthesia, 30 percent under local anesthesia, and 10 percent under regional or spinal anesthesia. In general, operating rooms are built in pairs so that a patient can be prepped in one room while the surgeon is completing a procedure in the other room.
The outpatient surgery market has experienced significant growth since the first ambulatory surgery center opened in 1970. This growth has been fueled by three factors. First, rapid advancements in technology have enabled many procedures that were historically performed in inpatient surgical suites to be switched to outpatient settings. This shift was caused mainly by advances in laser, laparoscopic, endoscopic, and arthroscopic technologies. Second, Medicare has been aggressive in approving new minimally invasive surgery techniques, so the number of Medicare patients utilizing outpatient surgery services has grown substantially. Finally, patients prefer outpatient surgeries because they are more convenient, and third-party payers prefer them because they are less costly.
These factors have led to a situation in which the number of inpatient surgeries has grown little (if at all) in recent years while the number of outpatient procedures has been growing at six to seven percent annually and now totals about 23 million a year. Rapid growth in the number of outpatient surgeries has been accompanied by a corresponding growth in the number of outpatient surgical facilities. The number currently stands at about 5,700 nationwide, so competition in many areas has become intense. Several ambulatory surgery centers currently exist in the Twin Falls area, and group of local physicians is exploring the feasibility of a physician-owned facility.
The hospital currently owns a parcel of land that is a perfect location for its proposed surgery center. The land was purchased five years ago for $350,000, and last year the hospital spent (and expensed for tax purposes) $25,000 to clear the land and put in sewer and utility lines. If sold in today’s market, the land would bring in $500,000, net of realtor commissions and fees. Land prices have been extremely volatile, so the hospital’s standard procedure is to assume a salvage value equal to the current value of the land.
The surgery center building, which will house four operating suites, would cost $5 million and the equipment would cost an additional $5 million, for a total of $10 million. The project will probably have a long life, but the hospital typically assumes a five-year life in its capital budgeting analyses and then approximates the value of the cash flows beyond Year 5 by including a terminal, or salvage, value in the analysis. To estimate the terminal value, the hospital typically uses the market value of the building and equipment after five years, which for this project is estimated to be $5 million, excluding the land value.
The expected volume at the surgery center is 20 procedures a day. The average charge per procedure is expected to be $1,500, but charity care, bad debts, insurer discounts (including Medicare and Medicaid), and other allowances lower the net revenue amount to $1,000. The center would be open five days a week, 50 weeks a year, for a total of 250 days a year. Labor costs to run the surgery center are estimated at $800,000 per year, including fringe benefits. Supplies costs, on average, would run $400 per procedure, including anesthetics. Utilities, including hazardous waste disposal, would add another $50,000 in annual costs. If the surgery center were built, the hospital’s cash overhead costs would increase by $36,000 annually, primarily for housekeeping and buildings and grounds maintenance.
One of the most difficult factors to deal with in project analysis is inflation. Both input costs and charges in the healthcare industry have been rising at about twice the rate of overall inflation. Furthermore, inflationary pressures have been highly variable. Because of the difficulties involved in forecasting inflation rates, the hospital begins each analysis by assuming that both revenues and costs, except for depreciation, will increase at a constant rate. Under current conditions, this rate is assumed to be 3 percent. The hospital’s corporate cost of capital is 10 percent.
When the project was mentioned briefly at the last meeting of the hospital’s board of directors, several questions were raised. In particular, one director wanted to make sure that a risk analysis was performed prior to presenting the proposal to the board. Recently, the board was forced to close a day care center that appeared to be profitable when analyzed but turned out to be a big money loser. They do not want a repeat of that occurrence.
Another director stated that she thought the hospital was putting too much faith in the numbers: “After all,” she pointed out, “that is what got us into trouble on the day care center. We need to start worrying more about how projects fit into our strategic vision and how they impact the services that we currently offer.” Another director, who also is the hospital’s chief of medicine, expressed concern over the impact of the ambulatory surgery center on the current volume of inpatient surgeries.
To develop the data needed for the risk (scenario) analysis, Jules Bergman, the hospital’s director of capital budgeting, met with department heads of surgery, marketing, and facilities. After several sessions, they concluded that only two input variables are highly uncertain: number of procedures per day and building/equipment salvage value. If another entity entered the local ambulatory surgery market, such as the physician-owned facility, the number of procedures could be as low as 15 per day. Conversely, if acceptance is strong and no additional competing centers are built, the number of procedures could be as high as 25 per day, compared to the most likely value of 20 per day. If real estate and medical equipment values stay strong, the building/equipment salvage value could be as high as $7 million, but if the market weakens, the salvage value could be as low as $3 million, compared to an expected value of $5 million. Jules also discussed the probabilities of the various scenarios with the medical and marketing staffs, and after a great deal of discussion reached a consensus of 70 percent for the most likely case and 15 percent each for the best and worst cases.
Assume that the hospital has hired you as a financial consultant. Your task is to conduct a complete project analysis on the ambulatory surgery center and to present your findings and recommendations to the hospital’s board of directors. To get you started, Table 1 contains the cash flow analysis for the first three years.
Table 1
Partial Cash Flow Analysis
0 1 2 3
Land opportunity cost ($500,000)
Building/equipment cost (10,000.000)
Net revenues $5,000.000 $5,150,000 $5,304,500
Less: Labor costs 800.000 824.000 848,720
Utilities costs 50.000 51,500 53,045
Supplies 2,000.000 2.060.000 2.121,800
Incremental overhead 36,000 37.080 38,192
Net income $2114.000 $2.177.420 $2,242,743
Plus: Net land salvage value Plus:
Net building/equipment salvage value
Net cash flow (810.500.000) 82114.000 52.177.420 $2.242.743
QUESTIONS
- Complete Table 1 by adding the cash flows for Years 4 and 5.
- What is the project’s payback, NPV, and IRR? Interpret each of these measures.
- Suppose that the project would be allocated $10,000 of existing overhead costs. Should these costs be included in the cash flow analysis? Explain.
- It is likely that many of the procedures at the outpatient surgery center would have otherwise been performed at the hospital’s inpatient surgery unit. How should the analysis incorporate the cannibalization of inpatient surgeries? Would the handling of cannibalization change if you believed that the local physicians were going to open an outpatient surgery center of their own? (Only discuss the issues here—no numbers required.)
- Conduct a scenario analysis. What is the project’s expected NPV? What are the worst- and best-case NPVs? How does the worst-case value help in assessing the hospital’s ability to bear the risk of this investment?
- Now assume that the project is judged to have high risk. Furthermore, the hospital’s standard procedure is to use a 3 percentage point risk adjustment. What is the project’s NPV after adjusting for the assessment of high risk?
- What is your final recommendation regarding the proposed outpatient surgery center? What is your justification for your recommendation?
Financial Performance Review Presentation
A general manager must be able to examine financial statements, annual reports, and other market data to analyze organizational performance. Bringing your innovations to market requires that you understand your organization’s strategic objectives and can leverage business strategies to create competitive advantage.
This week, you will demonstrate performance management when you complete a financial performance review presentation. You will start scanning and researching the industry that is the right market for your innovation.
Assessment Deliverable
Create an 8- to 10-slide analysis of the organizational performance of the competitors for your innovation, including detailed speaker notes.
Research financial statements or annual reports of at least 2 companies in the same or a comparable industry. Examine their business models and identify strategies the companies use to achieve their business objectives.
Analyze the companies and describe what you learned about their organizational performance. Consider the following in your analysis:
How do they generate revenue?
How do they distribute their products or services to their customers?
How do they acquire their customers?
Why is their product or service valuable to their customers (absolute value)?
Evaluate how your research applies to your innovation. Consider the following in your evaluation:
What lessons can you apply to your own innovation?
How does your organizational analysis relate to the development of a strategy to bring your innovation to market?
Financial statements
Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms. Do investors need to worry about the validity of those statements? Explain your answer.
Changes in California Housing Prices
Analyzing the Changes in California Housing Prices from 1990s to 2022 (10 points)
Data File: MedianPricesofExistingDetachedHomesHistoricalData.xlsDownload Data File: https://peralta.instructure.com/courses/58148/files/6578640?wrap=1
MedianPricesofExistingDetachedHomesHistoricalData.xls https://peralta.instructure.com/courses/58148/files/6578640/download?download_frd=1
Assignment Instructions
Refer to the embedded MS Excel data file sourced from the California Association of Realtors, which shows the median selling price detached single family
homes for each county in the State of California from 1990 to 2022.
Answer the following questions by analyzing the data presented.
Question #1
1a) Which county has the highest median selling price as of February 2022? (1 point)
1b) And the lowest? (1 point)
Question #2
2a) What was the median price of a detached single family home in Alameda County in 1992? (1 point)
2b) And how much is it now (as of February 2022)? (1 point)
2c) How much has the median home price increased during that time, in absolute dollars and percentage-wise (2 points)
Question # 3
3a) Do you find any time periods where most counties in the State experienced an extended period of decreases in the median selling price for detached
single family homes? (2 points)
3b) If so, when were these time periods, and can you correlate these time periods with any other events or causes? (2 points)
What to Upload:
file with your responses to the seven questions 1 a,b; 2 a,b,c, and 3 a,b as outlined above. Please be sure to include your name, class #, and date on your
response.
Analysing a company’s performance
I. Choose a company and using vertical analysis review their efficiencies when compared to another company within the same industry.
II. Using horizontal analysis, explain how the company is progressing year on year over a three year period and compare the two companys performances.
III. Explain the differences between the two companies, highlighting who you feel is doing the better job.
Please use the below link to get data (please use below two links for the two companies)
1: https://www.marketwatch.com/investing/stock/ac/financials?countrycode=fr&mod=mw_quote_tab
2: https://www.marketwatch.com/investing/stock/ihg/financials?countrycode=uk&mod=mw_quote_tab
Comparing a company’s financial ratios with those operating within the same industry.
Determine why it is sometimes misleading to compare a company’s financial ratios with those of other firms that operate within the same industry. Support your response with an example from your research.
Diva Shoes exposure to excnange rate risk
I Think about Diva Shoes exposure to excnange rate risk in April 1995. Suppose Diva chooses to hedge its exposure in YEN with the forward contract described in case Appendix A or the currency option described in case Appendix B. Assume that the strike price on the option and the forward price are given by interest rate parity for September 1995. Evaluate the payoffs from each strategy on the expiration date.
Just think about:
1. Which choice do you recommend for Diva?
2. Are there any other approaches you could recommend that Diva use to hedge its exchange rate risk?
3. Do you recommend Diva hedge their exposure?
4. If so, which alternative would you recommend?
Below is a spreadsheet template, which you can use to solve the case. The deliverable for this case is the completed spreadsheet, which you can upload on the course website by the due date.
Business Finance
As companies expand abroad and decide to enter foreign markets, a host of items need to be considered. Please complete the following scenario:
You are hired as a consultant to help a midsize U.S.-based company expand into new regions. The company is currently only in the U.S. domestic market. You are tasked with selecting three host countries for the company to expand into within the next five years.
Select the industry of the company and the three host countries. Prepare a persuasive report on why you have selected these specific host countries. In addition, state the mode of entry for each country and any challenges that need to be addressed. (This should not be a narrative but a business report. Please do not use “I”).
In your paper,
· Create a fictitious company with a brief background (size, industry, organizational style, etc.).
· Select three host countries for the company’s international expansion.
· Analyze three host countries regarding the viability of the company expanding into each one.
· Explain the mode of entry into each country.
· Address any challenges that may arise for entering each host country.