Palm Hospital Notes

Palms infirmary (Traditional Project Analysis) Palms Hospital * 250 bed readiness investor owned Islamorada, Florida * Founded in 1946 by Rob Winslow, went back in 1967 after the war * High economic evolution, population expansion Acknowledged to be one of the leading healthc argon providers in the area * presently evaluating a proposed ambulatory (outpatient) surgery centre * More than 80% o all outpatient surgery is performed by specialists * Minor procedures take about one hour or less(prenominal), major procedures take two or more hours * About 60 percent of the procedures are performed beneath general anesthesia, 30 percent under local anesthesia, 10 percent under regional or spinal anesthesia * Operating rooms built in pairs for prep and surgery efficiency * Outpatient surgery market has experienced significant growth since the first ambulatory centre opened in 1970 1990 2. million surgeries, 2009 more than 20 million surgeries * product was fueled by three factors ra pid advancements in technology made it possible for inpatient surgeries to be performed as outpatient surgeries, Medicare has been aggressive in approving new minimally invasive surgery techniques, meaning upshot of Medicare patients who use outpatient surgery services has grown substantially patients prefer outpatient surgeries for convenience, and third party payers prefer them for less cost * Inpatient surgery subjugates have been flat due to these factors over the last 20 years outpatient procedures grow at 10% annually * No other outpatient surgery centre exists in Palms Hospitals immediate environment, but rumors about physician owned facilities are surfacing * Palms Hospital owns a grime adjacent to the facility that would be a perfect location for the new ambulatory surgery centre the land was bought for $150,000, spent $25,000 to clear the land (also expensed for tax purposes) to put sewer and utility(prenominal) lines. If change today, the land will ring in $200,000. * The supposed expression will house quatern operating suites that will cost $5,000,000 plus another $5,000,000 for equipment costs for a total of $10,000,000. *Note the building and the equipment fall into the modified accelerated cost recovery system (MACRS) five-year class for tax depreciation purposes in reality, the building has to be depreciated over a longer period than the quipment * Although the device may have a longer life, the hospital assumes a five-year life in its capital budgeting analyses and then approximates the value of the specie flows beyond year 5 by including a terminal/ deliver value in the analysis to picture this value, the hospital uses the market value of the building and equipment after five years, which in this case is $5M before taxes, excluding land value. *Note taxes must be paid on the difference between an assets scavenge value and tax book value at termination for example, if an asset that cost $10,000 is depreciated to $5,000 and then sol d for $7,000, the firm owes taxes on the $2,000 excess in salvage value over tax book value * Expected volume for this centre is 20 procedures a day, with an come charge of $1,500 but charity care, great(p) debts, managed care plan discounts and other allowances lower the net revenue amount to $1,000 the centre will be open 5 days a week, 50 weeks a year, 250 days out of the year.Labor costs are expected to run at $918,000 a year excluding fringe benefits utility costs run at $50,000 a year * If the centre is built, hospitals cash overhead will increase by $36,000 annually, primarily for housekeeping, building and grounds maintenance centre will be allocated $25,000 of the hospitals accredited $2. 8M administrative overhead costs. On average, each procedure will require $200 in spendable medical supplies, including anesthetics. The hospitals inventories and receivables, as well as accruals and payables will increase. Overall change in net working capital is expected to be small, therefore not imperative to the analysis. The hospitals tax rate is 40%. * Inflation one of the most difficult factors to deal with in project analysis. Input costs and charges have been rising at twice the rate of overall inflation. Inflationary pressures are highly variable.Analysis is started by assuming that both revenues and costs, except for depreciation, will increase at a unbroken rate which they project will be at 3%. * Board members concerns wants to make sure that a do it risk analysis including sensitivity and scenario analysis is performed before the proposal is presented (board was forced to close a daycare that appeared to be profitable but turned out to be a big property loser 2 years ago) * Another concern would be the impact of the centre on the incumbent volume of inpatient surgeries. Surgery department head projected that the outpatient surgery centre could siphon dark up to $1,000,000 in cash revenues annually, hat could lead to a $500,000 reduction in annual cash expenses * The data developed for risk analysis were as follows three input variables are highly indeterminate number of procedures per day, average revenue per procedure, building/equipment salvage value. If another centre was built to compete with theirs, number of procedures could be as low as 10 a day, but if acceptance to their centre is strong, they could be doing 25 procedures a day. * Net average revenue (cost of procedure) is $1000. But if surgery severity is high, net average revenue could be $1,200. If severity is low, it could be $800. If real estate and medical equipment values stay strong, salvage value could be as high as $6M, but if it weakens, itll be as low as $4M considering that the average salvage value is $5M. Another board member question why the scenario analysis solitary(prenominal) had three scenarios and suggested 5 or 7. * Based on historical scenario analysis data that use trump out case, worst case, and most likely, the hospitals averag e project has a coefficient of variation of NPV (net present value) in the range of 1. 0-2. 0 and the hospital typically adds or subtracts 4 percentage points to its 10 percent incorporate cost of capital to adjust for differential project risk. * Note the case asks us to conduct complete project analysis and present findings. It suggests the application of Monte Carlo simulation (but that is bullshit because thats the simulation you collect a computer software for).