You are the chair of the budgeting team at a Health Care medical center and are in the process of approving the budget for the next few years. The following proposals have been made.
Proposal 1:
A psychiatric facility to operate in the medical center. The facility will provide services to patients on an outpatient basis. The facility will operate Saturday and Sunday to 8:00 am to 6 pm. The labor requirements will be one salaried physician per day; two nurses for each day and one medical assistant/front office staff member per day. The goal is to provide needed mental health services within the community. The proposal will require an initial outlay of $15,000 plus $75,000 per year fixed costs and an additional $40 in variable costs per patient seen at the clinic.
The financial projections for the clinic are as follows:
Initial investment/outlay $15,000
Variable costs mp; nbsp; $40/patient
Fixed costs $75,000/year
Price charged per visit $120/patient fixed for three years
# of patients projected in 1st year 500
Increase in # of patients 500/year for four years.
Anticipated cash flows [Y1: -35,000] [Y2: 5,000] [Y3:45,000] [Y4: 85,000]
Proposal 2:
Lease of a CT scanning machine for operations 24 hours a day 7 days a week. The lease of the CT will obviate the need to purchase CT services from outside mobile CT units. This proposals will require a monthly lease, service and insurance payment of $50,000 and an additional variable cost of $500 per case. The medical center will have to pay the CT training and continuing education of its radiology staff of 8. There will also be a $26,000 cost in preparing a room for the CT scanner. This translates to a total initial outlay of $50,000
Financial projections of the CT scanner:
Initial investment/outlay $50,000
Variable costs $500/patient
Fixed costs $50,000/month
Price charged per visit $950/patient fixed for three years
# of patients projected in 1st year 1,000
Increase in # of patients 500/year for four years
Anticipated cash flows [Y1: -150,000] [Y2: 75,000] [Y3: 300,000] [Y4: 525,000]
1. Calculated and identify the point at which both proposals will break-even.
2. Calculate and identify the point at which the cash flows of both proposals will payback all of the investments and losses and actually become profitable.