Scenario 1: ABC Hospital
ABC Hospital is a rural facility in Medford, Oregon that competes with two other hospitals in delivering quality patient care in the Rogue Valley. One of the competing hospitals provides cancer treatment services similar to ABC Hospital and has been gaining a larger market share in the last 12 months because of its television and billboard ads.
Recently, the local news station covered a story about a report published by an independent research company stating that in the last five years, the Rogue Valley has experienced a steady increase of residents with pancreatic and testicular cancer. In response to this report and because of the shrinking market share, the chief executive officer (CEO) of the hospital has tasked the chief strategy officer (CSO) and the chief financial officer (CFO) with exploring whether it should make additional investments in cancer treatment services that will allow the organization to increase its capacity to serve more patients and gain a larger sector of the market.
Based on their analysis, the CSO and CFO have presented you with the following two options to review prior to the meeting with the CEO:
- Option 1: ABC Hospital invests $11,995,000 in the development of a new state-of-the-art cancer treatment center. Based on their estimates, the first year cash flow will be $2,000,000, the second year cash flow will be $4,000,000, the third year cash flow will be $5,000,000, and the fourth year cash flow will be $8,000,000. The expected return of 8.9% is used as the discount rate.
- Option 2: ABC Hospital invests $5,095,000 in a joint venture with a reputable oncology group and the hospital agrees to a 55% interest in the joint venture. Based on the estimates, the first year cash flow will be $1,500,000, the second year cash flow will be $3,000,000, the third year cash flow will be $4,500,000, and the fourth year cash flow will be $6,500,000. The expected return of 8.9% is used as the discount rate.
Explain which of the two options you would recommend to the CEO. You may only select one option. Support your position and show your calculations. It is essential that you use at least two different financial ratio calculations.
Scenario 2: Serenity Health Care
Serenity Health Care is a large integrated health care system located in the Midwest. It has a 100-year tradition of providing quality patient care to its customers regardless of their ability to pay for services. Recently, the chair of the board of directors and the chief executive officer (CEO) of Hall Healthcare System, a competitive organization, approached Serenity’s CEO about a partnership because of its inability to continue to compete with Serenity and its declining financial performance.
Because Serenity is three times larger than Hall, the CEO would like to present to his board of directors a proposal in which Serenity acquires Hall Healthcare System. Here is the information that he plans to present to the board:
|Cash and cash equivalents||$2,275,884||$7,900,318|
|Receivables, less doubtful accounts||$4,958,923||$4,000,891|
|Other current assets (inventory)||$2,667,391||$5,590,076|
|Total current assets||$13,848,196||$18,779,217|
|Property and equipment||$4,510,961||$3,982,018|
|Other long-term assets||$2,301,810||$2,367,809|
|Liabilities and net assets|
|Current portion of long-term debt||$850,000||$1,562,091|
|Estimated third-party settlements||$962,908||$1,409,610|
|Accrued salaries, wages, and fees||$5,837,624||$7,903,871|
|Other accrued liabilities||$2,163,187||$2,843,098|
|Total current liabilities||$12,934,411||$19,708,798|
|Long-term debt, net||$2,450,873||$3,906,781|
|Other noncurrent liabilities||$938,578||$1,456,053|
|Total net assets||$6,734,526||$4,989,509|
|Total liabilities and net assets||$23,058,388||$30,061,141|
As a board member, calculate Hall Healthcare System’s current ratio and acid ratio to determine whether you support your CEO’s decision to acquire Hall. Support your position and show your calculations.
Current ratio = Current assets / Current liabilities
Acid ratio = Total current assets less inventory / Total current liabilities
Scenario 3: Montgomery Home and Community-Based Services
Montgomery Home and Community-Based Services is considering a major expansion that will enable it to attract a different clientele to its organization. Currently, they serve only 34% of the frail elderly seniors and persons with disabilities in a three county area, with the majority of the residents working for the federal and state government. Montgomery relies 100% on local government funding to provide in home support and homemaker service to their clients. Their new chief executive officer (CEO) would like the organization to expand its revenue stream by investing in a senior multipurpose center serving healthy seniors by offering them arts and crafts and health and wellness programs. The center will also contain an Internet café offering nutritious breakfast and lunch options.
The CEO has commissioned a needs assessment, and the study’s results reveal that there are only 15 retired seniors who would be willing to pay the monthly fees to access the center. Further results reveal that there are approximately 120 seniors who will be retiring from the government in three years who would be willing to become members at the center.
The proposed costs to operate this new facility are as follows:
Monthly Fixed Costs
- Utilities: $590
- Health/Wellness Staff: $2,500
- Arts/Crafts Staff: $2,000
- Supplies: $800
- Fitness Equipment Maintenance Contract: $200
- Monthly Membership Fee: $105
- Monthly Lunch Cost: $25
- Monthly Breakfast Cost: $15
Based on the information above, the initial investment to establish the center is $317,880. The organization anticipates that it will generate $25,700 of revenues in the first year, $40,000 in the second year, $78,000 in the third year, $225,000 in the fourth year, and $310,000 in the fifth year.
The CEO has presented her proposal and financial information to the board of directors, and they have advised her that they are in full support of her strategy if the program is a benefit to the community and if the organization can recoup its investment in three years. Based on the information presented in the scenario, calculate the two analyses below and explain their implications.
- Perform the break-even analysis to determine how many seniors would need to have full monthly membership and pay for breakfast and lunch for Montgomery Home and Community-Based Services to cover its monthly expenses.
Break-even volume = Total fixed costs / (Average charge per client – Average variable cost per client)
- Calculate the payback period to determine how long it will take for the organization to recover its initial investment of establishing the senior multipurpose center.
Payback period = A + (B/C)