BUS525 Managerial Accounting HBSP Product Number TOGI55 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Erie Hospital Dr. Christian Larson Chief of Cardiology at Erie Hospital, was contemplating the proposal ne- cently submitted to him by Dr. Francesca Michaels, the head of the Cardiac Cath Lab, Dr. Mi- chaels' request was for the purchase of some new equipment to perform operations currently being Performed on different, less efficient equipment. The purchase price was S3000000,delivered and BACKGROUND Erie Hospital was a nonprofit,university-affiliated medical center, whose physicians practiced in a number of ialties and subspecialties. A 350-bed located on of Lake Erie existence for some 40 years. Although it treated patients with a in Cleveland, of problems its was cardiology, where it prided itself on having the latest in technology and up-to-date services and facilities, Because of the rapid changes taking place in the field of maintaining the hospital's cutting-edge position required rather constant pgrading of its facilities and equipment. Due to third-party payments based on diagnosis-related groups DRGs), ie. a to the hospital for each patient, based on that patient's discharge there had been increas- dia ing pressures on the hospital's bottom line." Although some of equipment and facilities used for research, and could be purchased with research fundi clinical purposes had to be financed from patient care revenues only. of the increased fi- nancial pressures, the hospital was taking a harder and harder look at allcapital equipment propos- als designated for patient care purposes. THE REQUEST In the case of Dr. Michaels' request, the equipment was for patient care purposes. No grant lable, and hence the cost would need to be financed from patient care revenues. Dr funds were avail Michaels had worked closely with the equipment manufacturer to determine the potential benefits of the new equipment, however, and she estimated that it would result in annual savings of S60.000 in labor and other direct costs. as compared with the present equipment. She also estimated that the proposed equipment's economic life was 10 years with zero salvage value. The hospital had recently bomowed long-term to finance another project Paul Hershenson, the Vice President of Fiscal Affairs, had informed Dr. Larson that, because of this, he was certain the hospital could obtain additional funds at 12 percent although he would not plan to negotiate a loan specifically for the purchase of this equipment. He did feel however, that an investment of this type should have a retum of at least 20 percent even though the hospital paid no taxes. The hospital capital structure is shown in Exhibit 1 COMPLICATING FACTORS There were three complications. First, the present equipment was in good working order and Second, this request was for what Dr. Michaels called "even better equipment," to replace some equipment purchased two years ago involving the same economic lie and dollar amounts.Dr Michaels had informed Dr. Larson that the new equipment would render the existing equipment completely obsolete with no resale value. prepared by Professor David W. Young. It is intended as basis for cla disculsion and mot illus This case was orate either effective or ineffective handling of an administrative situation. Copyright e 2014 by The Crimson Group. Inc. To order copies or request permission to reproduce this document. contact Harvard Business ublications (httpolhbspharvardada). Under provision of Unied Sunes and inema tional copyright laws. no part of this document may be reproduced stored, or in any form or by any emeans without written permission from TheCrimson Group (wwwhecrimsongouparg)