Time Value of Money Explanation

Time Value of Money

Scenario 1
The Children’s Hospital of Philadelphia (C.H.o.P) is considering adding a da Vinci robot to their Operating Room suites. The purpose of the acquisition is to facilitate more urologic cases hence deriving more income. Since most urological cases are done on an outpatient basis this initiative serves two (2) purposes tied to the facility’s Master Strategic Plan;
a) enhance the bottom line performance of the OR
b) address the trend in patient care to outpatient procedures from traditional in-patient procedures.

The da Vinci lists at $1.75M today. The facility has one (1) da Vinci and they want to have the physician group trained in using the equipment prior to procurement as the Urologic surgeons do not currently use the da Vinci – it is the exclusive domain of the Neurosurgery team. In doing so the robot can go right into productive use and the learning curve for the physician group will already be met. Intuitive Surgical, the manufacturer of the da Vinci, has agreed to lend CHoP a simulator to assist CHoP in their desire to have the physician group trained when he new robot is received. However, Intuitive has their simulator booked into other facilities across the country and the earliest available date to receive the simulator is 16 months away.

Armed with that knowledge, the Strategic Planning Committee deems that the simulator training for the physician group will take 12 weeks. In optimal conditions the new da Vinci will be on-sight for the physicians to use immediately after they complete their training. So, the Strategic Planning Committee, in concert with the Purchasing Department negotiates delivery of the new da Vinci for April 29th, 2012 to be fully operational by May 5th, 2012. Since the new fiscal year at CHoP begins on April 1 and runs through March 31st, this acquisition will be two (2) fiscal years away.

If the equipment were being purchased this fiscal year CHoP is in a financial position that they could purchase the machine under their Capital Budget funding ceiling. However, since the Strategic Planning Committee suggests the purchase be made two (2) fiscal years out the CFO is concerned that the market conditions in the state of Pennsylvania will change to the point where the Hospital may have to borrow money to make the purchase. The Board will not accept that strategy so the CFO needs to plan for the acquisition now. The Board has directed that the Hospital will not issue a series of bonds so that option is off the table. The CFO has shopped the investment market in the immediate area and finds that the best CHoP can do is a return of 5.25% on their investment over two (2) years. The CFO has locked that rate down so market shifts will not impact that rate for two (2) years.

1. What will the $1.75M have grown to in 2012 when the facility needs the money to make the acquisition? The vendor assumes that the purchase price will escalate at a rate of 6% annually.

2. Will the facility have enough money on hand from the investment in two (2) years time to cover the cost of the da Vinci or will they have to find additional Capital funds to make the acquisition happen?

3. If they will not have enough in 2012, how much short (if they are short at all) will they be?

Scenario 2
The Director of the Emergency Medicine Service at Brigham’s and Women’s Hospital in Boston has submitted her Revenue for the next fiscal year. In preparing her volume projections she noted that for the last seven (7) months her volumes through her Emergency Room were flat. There had been incremental creep in her volumes for the fist two (2) months of the new fiscal year but for the last seven (7) months there has been zero growth in volume.

In the preparation of her volumes for the next fiscal year she instructed her Administrative Assistant to peg the new year’s volumes at the current year’s budgeted volumes. So, that meant that there would be zero growth from this sector of her overall division.

In preparing her expense budget she anticipated and budgeted a 3% inflationary increase of the cost of all non-labor expense. Additionally she budgeted a 4% pay increase in her non-exempt employee base. Her current expense budget for the Emergency Room, including salaries and benefits, is $12,475,312. The salaries and benefits component of that sum is 63%. Her budgeted Revenue for the current year is $19,813, 978.

The fiscal intermediary the hospital utilizes has already deemed that there will be no price increase in any service or procedure performed in the Emergency Room next fiscal year.

1. Given that the numbers of procedures and visits next year will be exactly what they are projecting this year, what will the revenue for the Emergency Room look like in 2010 dollars assuming a 3% inflationary rate?

2. Calculate the gross income before tax of the current year’s operations using the numbers cited in the question.

3. Compute the increase in the Emergency Room’s expenses next fiscal year given the information in the scenario and then compute the gross revenue before taxes for next year’s operation. Assume all labor is non-exempt.

4. How much did the Emergency Room make or lose in the second year relative to the first year?

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