Hospital Addition Construct new wing for Heart Catheritization Lab for $4,000,000 Purchase technical and office equipment for lab for $1,500,000 Recruit and train new staff and office personnel prior to operation for $250,000 The expected annual income from the addition comes from the following sources: $80K direct patient billing $150K Medicare and Medicaid reimbursement $230K Private insurance reimbursement Operational expenses and overhead are expected to cost 30% of the gross income above. The hospital will finance the project through $2,000,000 in bonds and a bank loan from National Best Bank. They will have to pay the equivalent of a 10% Rate of Return to attract investors in the bonds. the economic value. National Best charges 5% for qualified loans to institutions like hospitals, but limits their loan to 75% of What is the cost of the project? What is the expected Net Income of the addition? How much the hospital need to borrow and what will the Capitalization Rate be? What is the Economic Value of the addition? Can the loan be made? Project cost Constructutiv . Net income calculations Patients $ 80, DOU Start up cost 1, 505 , DDD 250, 030 Government 150, OND 230, UJJ 5, 750, DD ) Insurance Sub to + 2 1 460, 000 to: Eadv, Rate Calculcan is cavity . 30 % OP, exp as Overhead - 13 8, ONO 2002,ODD 322, oUD at borrowed 3, 750, 020 Net income bank + ') . borwowed 65. 22 4. = ( 5, 750, 20)- 3200, 100/ 5, 750, JUD) nerest rate 5, 00 % s ROR/ Rate of Return 10/007. 6. 74 % = 0- 655 2 x 0. 25 + ( 1 - 0 . 65 22) XO. ) 1 1 VAUP = Net intoRR 4, 778, 065 = 322, 070 / 0. 0674 =$47 77, 448 MM 75%. Dd EV : 47 77, 493 x0. 75 3, 583, 08 6Chapter 13 Show calculations for Capitalization Rate, Net Income, and Economic Value 1. Cattle Ranch business plan: Purchase 55 acres for $220k Purchase 20 beef cows for $46K Purchase fence improvements for $4K Purchase pick-up truck for $10K Use $80,000 of personal funds, borrow remainder from Lost Valley Bank at 8%. Plan to sell 16 calves for $32K each year. Will have $8K of expenses for supplements, fuel, and machinery hire. I have a minimal rate of return of 12%. Lost Valley can only loan up to 75% of the economic value. Should they make the loan? 2. Deck Builders expansion plan: Construct pole barn to store equipment and materials for $12K. Purchase trailer for $4K. Purchase tractor, blade, and auger for $16K. New limited partner will put in $10K towards expansion. I apply to borrow the remainder from Second Federal Bank at 6% interest. I have a minimal rate of return of 10%. Market analysis indicates I can complete 10 more deck projects each year with an average profit of $600 each. I can also save an average of $100 per project on materials by buying in advance and storing them in the new barn. This will apply to a total of 50 projects per year. Second Federal will loan up to 70% of the economic value for small loans like this. Should they make the loan
