HSMP 587 - Health Care Financial Management 10/23/17
Fall2017Dr. Neal Wallace
Take Home Mid-Term Exam
Generic Directions: The exam is expected to be completed independently by each student. The exams are due by class onOctober30. E-mail midtermfiles to me using the name MDT-lastname-587. There are 5 questions at 20 points each. Questions may have multiple parts. Read each question carefully and be sure that you respond completely to each. For answers to the questions that require calculation, make sure I can identify the formula or methods used to obtain your answer. Your answers will be based on the business model you have developed in class – so your answers will be unique to you – and thus I will need to see process and underlying numbers.Usingyour last budget spreadsheet created through Oct. 23rd class (my example:HFMthruCapplanningExampleF17.xls), rename your file as noted above and put yourexam answers on a separate worksheet. You can refer me to other places that you do work e.g. “new” cash budgets, but put the “final” summary answers in one sheet. For questions that do not involve calculations, you can submit answers in a separate WORD document. Last, answers for question 5 require making changes to your model, copy the answers for this question on your main midterm spreadsheet but also create and save another spreadsheet labeled MDTQ5-lastname-587 that has the changes and submit that so I can see your process. So, you should submit a minimum of two EXCEL files (midterm answers and Q#5 model), and potentially one more WORD document.
1)a) What are the five types of budgets we have discussed?
b) What accounting method does each use?
c) What does each do?
d) In what ways are they interrelated i.e. how does one affect the other, if at all (be thorough)?
e) What does it mean to budget “conservatively” and why is that important?
2) Assume that you will replace all your equipment at the beginning of your seventh year (2024) of operation.
a) What is the value of your depreciation expense for your original equipment in each of the first six years(2018-2023), and in total across that period?
b) Suppose you have fully funded your depreciation expenses each year (i.e. collected cash equal to your budgeted depreciation levels) and at year end you can invest this cash at 3% annual (compounded) return. What is the future value of this cash streamby the end of the sixth year (2023)?
c) Given the value of your depreciation fund plus interest that you accrue through 2023, what level of average annual price inflation could this amount support in purchasing new equipment at the beginning of 2024?
3) Make the following additions to your cash and capital budgets and respond to the related questions.
a)Create cash budgets through 2022, assuming no new equipment purchases or other changes in our business (I can just look at the cash budget tab here, do not move this to your final answer section).
b)Add columns to your capital budget through 2022 and modify formulas (cells pointed to) as appropriate to reflect capital activity in these years (as in a) above, you do not need to move this part).
c) How much “free” cash have you generated by the end of 2022?
d) Suppose that you knew that average annual price inflation on your equipment from 2018-2022 would range between 3% and 5%. How much of your year-end free cash in 2022 should you allocate to your equipment reserves (depreciation plus other) to be prepared to buy new equipment in 2023, and why?
4) Assuming that your business continues as planned so far (i.e. 2019 is full capacity, no inflation):
a) What expense items will change in value from 2019 through 2023 assuming no equipment replacement until 2024 (i.e. from the second to the sixth year of operation)?
b) What are your expected expenses (total and minimum operating), and total revenuesfor each of the years 2018-2023 (no equipment replacement until 2024)?
c) What are our revenue per visit, total cost per visit, minimum operating cost per visit and difference (rev/visit-total cost/visit & rev/visit-Min Op Cost/visit) in each year from2018-2023?
d) Given what you find here (as well as in 3c above), what, if any, changes would you make in your initial business model and/or moving forward? Why or why not? In discussing this answer, consider and integrate the three concepts that underlie sound and ethical financial management, i.e. how do/did they relate to or influence your choice(s).
5) Assume you’re back in the planning stages and you’ve heard about a new lab testing machine that is more productive than the ones you originally planned for. They cost $100,000 to buy, have a 5 year useful life and will allow a lab tech to produce one additional lab test per hour (four instead of three). Using another (renamed as noted in directions) copy of your business model, make the following adjustments, and record your answers.
a) Assume you will purchase this new equipment instead of the original. Change your expense statistics accordingly and identify which expense items other than debt payments (principal and interest) change in 2018 and/or 2019, in which direction (up or down) and why.
b) Zero out all principal payments in your cash budgets, then adjust the positive monthly capital inflow amounts in your cash budgets by $5,000 increments (up or down)to meet your cash in hand needs, and last redo your principal payment amounts.What is your total (maximum) debt (e.g. principal borrowed) under this new scenario? How does it compare to what you expected to borrow originally? What are your principal, interest and total debt payments for 2018-2022 under this new scenario, under the original scenario, and their difference? What are our total year-end capital reserves for 2018-2022 under the new and old scenarios and their difference?
c)Now look at your new capital planning model and report your “new” and “original” NPV and profitability ratios for both the more and less conservative approaches. Based on these figures, should you invest in the new equipment or not? What made this more/less profitable than the original model?