12 May ON THE MERITS OF YOUR NET PRESENT VALUE COMPUTATION, SHOULD CAVALIER SKILLED NURSING HOMES INVEST IN THIS PROJECT?
Question 1Suppose 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 2Cavalier 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 $380,000Year 3 $400,000Year 4 $420,000Year 5 $440,000Assuming 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 3Painless 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 4Rotary 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 5Better 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 B1 $500,000 $2,000,0002 $1,000,000 $1,000,0003 $2,000,000 $600,000a. 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 6The 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 millionObstetrics $6 millionPediatrics $2 millionThe direct costs of all 6 departments are:Adult medicine $6 millionObstetrics $3.6 millionPediatrics $1.2 millionAdministration $1 millionFacilities $4.4 millionFinance $1.8 millionDirect 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 byServices provided toAdminFacilitiesFinanceAdmin055Facilities1005Finance10100Adult Medicine355550Obstetrics201025Pediatriacs252015Total100100100a. 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.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 2Cavalier 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 $380,000Year 3 $400,000Year 4 $420,000Year 5 $440,000Assuming 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 3Painless 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 4Rotary 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 5Better 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 B1 $500,000 $2,000,0002 $1,000,000 $1,000,0003 $2,000,000 $600,000a. 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 6The 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 millionObstetrics $6 millionPediatrics $2 millionThe direct costs of all 6 departments are:Adult medicine $6 millionObstetrics $3.6 millionPediatrics $1.2 millionAdministration $1 millionFacilities $4.4 millionFinance $1.8 millionDirect 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 byServices provided toAdminFacilitiesFinanceAdmin055Facilities1005Finance10100Adult Medicine355550Obstetrics201025Pediatriacs252015Total100100100a. 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.
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