Question 5
Better 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 B
1 $500,000 $2,000,000
2 $1,000,000 $1,000,000
3
$2,000,000 $600,000
a.
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 6
The
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 million
Obstetrics $6 million
Pediatrics $2 million
The
direct costs of all 6 departments are:
Adult
medicine $6 million
Obstetrics $3.6 million
Pediatrics $1.2 million
Administration $1 million
Facilities $4.4 million
Finance $1.8 million
Direct
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 admin’s
services are provided to the finance department and 20% to obstetrics.
Table
1
| % of services provided by | |||
| Services provided to | Admin | Facilities | Finance |
| Admin | 0 | 5 | 5 |
| Facilities | 10 | 0 | 5 |
| Finance | 10 | 10 | 0 |
| Adult Medicine | 35 | 55 | 50 |
| Obstetrics | 20 | 10 | 25 |
| Pediatriacs | 25 | 20 | 15 |
| Total | 100 | 100 | 100 |
a.
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.
