Consider a not-for-profit hospital faced with a familiar choice: to open or not to open an emergency center in a new suburban hospital shopping mall. The mall's developers claim that referrals alone will make the center a financial winner of the hospital. Cautious analysis in the comptroller's office argue that the startup costs of the center, and its annual cash outflows (including insurance), will be a major drain on the hospital's overall cash flow. Initial cash outflows for the center are projected as follows: $300,000 for equipment, furniture, and fixtures; and $75,000 for new working capital (inventory, accounts receivable, cash on hand). Analysts in the planning department estimate that the center will generate 8 visits per day, 7 days per week, 52 weeks per year, with average cash inflow per visit of $50. The planning analysts also estimate $125,000 per year in net cash flows from increased admissions to the hospital. Annual operating expenses of the center will be $200,000. The hospital's weighted average cost of capital is 5 percent. As a not-for-profit provider, the hospital has zero income tax rate. The center has a expected life of 10 years and the expected salvage value of the clinic after 10 years will be $50,000. Is the emergency center a wise use of the hospital's limited funds? You may use the following framework to set up the problem (10 points).
Year Cash Direct Cash Indirect Cash Net Cash
Outflow Inflow Inflow Flow
0
1
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10