# What is the internal rate of return for each piece of equipment?

Question 1

Suppose
you are asked to do a cash flow budget for the next 12 months for a newly
opened baby health clinic. The budget must be done on a month-by-month basis.
As the clinic has just opened you have no historical accounting data. The
clinic is allowed to treat both private (fee paying) and public (no fee
charged) patients. Outline the steps you would take, the type of questions you
would need to ask and any assumptions you would need to make to develop the
budget. Highlight the main areas of concern you would have about the accuracy
of your forecasts – in particular, would you be more confident about your
revenue or expense forecasts?

Question 2

Cavalier Skilled Nursing Homes is considering
setting up a new medical facility. Management estimates that it will cost \$1.5
million to purchase the necessary equipment and renovate the building to
support its long term care services. The projected net cash flows generated by
the new facility over the next five years are given below:

Year 1 -0-

Year 2 \$380,000

Year 3 \$400,000

Year 4 \$420,000

Year 5 \$440,000

Assuming
a five year life and an 8% cost of capital, compute the net present value of
this proposal. On the merits of your
net present value computation, should Cavalier Skilled Nursing Homes invest in
this project? Explain your answer.

Question 3

Painless Dentists (Painless) expected
to treat 6,000 patients during 2011. The practice expected each patient to need
an average of 3 X-rays at a cost to Painless of \$11 per X-ray. Painless charges
Patients \$20 for each X-ray. The actual activity reports for 2011 showed that
5,500 patients came to the clinic and received an average of 3.25 X-rays with
an average per X-ray cost of \$10.50. For this question there is no need to do an
adjusted budget, simply do the difference between the actual and budgeted
figures.

a.
What is Painless revenue variance? Is the total revenue
variance favourable or unfavourable? Why?

b.
What is Painless expense
variance? Is the total expense variance favourable or unfavourable? Why?

c.
Was the net impact of the two
variances helpful or harmful to the economic health of the organisation? Why?

Question 4

Rotary
Hospitals static nursing labour expense budget for the month of November 2012
was \$64,800 (1,200 patients * 1.5 nursing labour hours per patient * \$36 per
nursing labour hour). During the month of November 2012 Rotary Hospital
actually cared for 1,300 patients. The actual nurse labour expense for the
month was \$84,175 and 2,275 nursing hours were actually worked.

Calculate Rotary Hospitals total variance between
its budget and actual nurse labour expense. How much of this variance was due
to:

a. actual patient numbers being different from the
budget?

b. the hourly cost of nursing services being
different from budget?

c. the number of nursing hours used being different
from budget?

d.
what factor caused the biggest difference between the actual and budgeted
figures?

Question 5

Better Health
Pty. Ltd. is evaluating whether to buy pieces of medical equipment each of
which requires an up-front expenditure of \$1.5 million. The projects are
expected to produce the following net cash inflows:

Year Equipment
A Equipment B

1 \$500,000 \$2,000,000

2 \$1,000,000 \$1,000,000

3
\$2,000,000 \$600,000

a.
What is the internal rate of return for each piece of equipment?

b.
What is the payback period for each machine?

c.
What is the net present value of each machine if the cost of capital
is 10 per cent? 5 per cent? 15 per cent?

d.
Should Better Health buy both machines, only one, or none? Explain
your answer.

Question 6

The
Adelaide Private Hospital has 3 patient services departments – Adult Medicine,
Obstetrics and Pediatrics. It also has 3 patient support departments –
administration, Facilities and Finance.

The
revenues of the three patient services departments are:

Adult
medicine \$12 million

Obstetrics \$6 million

Pediatrics \$2 million

The
direct costs of all 6 departments are:

Adult
medicine \$6 million

Obstetrics \$3.6 million

Pediatrics \$1.2 million

Administration \$1 million

Facilities \$4.4 million

Finance \$1.8 million

Direct
costs of the support departments are allocated to patient services departments
using the direct method on the basis of the % of services provided by the
support departments to the patient service departments.

Table
1 below gives the percentages of support provided by the support departments to
both each other and the services departments. For example, 10% of admins
services are provided to the finance department and 20% to obstetrics.

Table
1

 % of services provided by Services provided to Admin Facilities Finance Admin 0 5 5 Facilities 10 0 5 Finance 10 10 0 Adult Medicine 35 55 50 Obstetrics 20 10 25 Pediatriacs 25 20 15 Total 100 100 100

a.
Allocate
the support department overheads to the 3 patient service departments on the
basis of the % of services provided.

b.
Calculate
the profit and loss position for each of the patient service departments and
the hospital as a whole.

c.
Should
the hospital consider closing down any or all of the patient service
departments to increase its profitability or reduce its losses? Explain why or
why not.