Scenario:

St. Helpinus Hospital is considering the purchase of a new Wizbang machine. The current Wizbang machine is 15 years old and will be donated to a hospital if a new one is purchased.

The goal of this exercise is to determine some key financial management metrics that will inform your decision whether or not to purchase the new machine.

Data:

Cost of a new Wizbang machine	$250,000
Cost of capital	8%
Life of the new machine	5 years
Fixed cost per procedure on the new machine	$10.50 per procedure
Expected/Budgeted # of procedures per year	20,000
Profit goal for the first year	$36,800
Present Value factors	Use table on page 408 table 18-4
Payer Mix & Reimbursement Rates	Medicare - 60% - $50/procedure Medicaid - 30% - $48/procedure Self Pay 10% - $120/ procedure

Formulas:

Break Even	Cost of machine + fixed cost(# procedures) Price/cost per procedure
Historical Depreciation	Purchase Price Depreciation Life
Replacement Depreciation	Current Value Depreciation Life
Cost/Price Variance	(Actual Cost or Price Budgeted Cost or Price)*Actual Volume
Effective Interest Rate	(1+(i/n))to the nth power - 1
Profitability Index	Net Present Value Cost of item
Net present Value (NPV) of cash flow	Present value of cash flow cost Present value of cash flow = (cash flow* factor from table 18-4; based on interest rate and time)

-Over the life of the Wizbang machine what is the break even # of procedures necessary IF ONLY Medicare patients were treated. Use budgeted/expected volumes. It is not necessary to take into account depreciation.

-Given the budgeted life span of the machine (5 years) what is the budgeted cost per procedure?

-The sales and marketing team are CONVINCED that St. Helpinus will provide 25000 procedures on the Wizbang machine in the first year. If this turns out to be true what would the Cost/Price Variance be?

-If St. Helpinus borrowed the entire purchase price at a fixed rate of 8% interest and planned to pay it off in 5 years in fixed and equal payments what would the annual payment be?

-The Wizbang machine has a cost of $250,000. The payer mix is on the data sheet. It is expected that there will be 20,000 procedures per year at an average charge of $130 per procedure. What is the projected value of net revenue for the five year life of the machine?

-What is the present value of the cash flow given the data on the data sheet?