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Essentials of Applied Quantitative Methods for Health Services Managers

Chapter 13 Homework

13-1: A representative of a reputable financial services company has approached you as manager of a four-person group of anesthesiologists with an opportunity to purchase a 10-year annuity due for each member of the group. The annuity due would pay $40,000 each year beginning 5 years from now (i.e., at time = 5). What is the most you would be willing to pay now, per each physician, for this investment? Assume an appropriate discount rate of 7%. (10 points)

13-2: The hospital’s marketing and finance departments have just provided you, as chief financial officer, with pro forma income statements for your proposed sonogram center. These statements appear in the following.

Pro forma Income Statement (000)

Time t + 1 t + 2 t + 3 t + 4

Service Revenues (net) $425 $500 $580 $700

Expenses $400 $450 $525 $600

Depreciation Expense $35 $35 $35 $35

Net Income ($10) $15 $20 $65

What is the project’s IRR? Assume an initial investment of $175,000 and an appropriate discount rate of 6%. The hospital is operated as a not-for-profit facility. (10 points)

13-4: What are some of the factors that can influence the riskiness of projects (investments) in healthcare organizations? (5 points)

Chapter 13 Extra Credit: (6 points)

1. Calculate the IRR and MIRR for the following series of cash flows:

Year Cash Flow

CY ($450,000)

CY + 1 $79,000

CY + 2 $125,000

CY + 3 $140,000

CY + 4 $135,000

CY + 5 $45,000

Assume a prevailing discount rate of 7%