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Conversely, Proposal 2 operates at a $150,000 deficit for its first year of operation. Totals costs for the CT scan equipment are $1.1 million ($500,000 variable costs from $500 per patient and $600,000 fixed cost for insurance and equipment leases) while revenue for year one is only $950,000 (from per visit payments of $950 per patient). One thousand patients are expected in year one of operation. The initial cost of investment for Proposal 2 was $50,000 putting the total budget deficit for Proposal 2,-year 1 at $200,000. Total costs for year two are $1,350,000 while gross revenue reaches $1,425,000. This presents a positive cash flow of $75,000 however because of the loss of $200,000 in year one, net profits for year two are negative at $125,000 ($200,000 [year one net profit] - $75,000 [year two cash flow]). Balance ($150,000)
Like Proposal 1, Proposal 2 becomes profitable over the baseline in year three. Total costs for operation are $1.6 million while profits reach $1.9 million equally a positive cash flow of $300,000. This allows the medical center to recoup it's initial investment of $50,000 for the lease of the CT scanners as well as pay off the debt for the previous two years or $125,000 equaling net profits of $175,000. Year four of operation for Proposal 2 has total costs at $1.85 million while the gross revenue for the year is $2.375 million equaling a positive cash flow of $525,000. Combined with previous year's net profit of $175,000 total net profit for four years equals $700,000.
Proposal 1
Investment
$15,000
Break Even Point
$50,000
Variable costs
$40
per patient
ROI
Fixed costs
$75,000
per year
Net Profits
$85,000
Patient fee
$120
per visit
IRR
72%
Patients
year one
Growth
per yr
Year 1
Year 2
Year 3
Year 4
Investment
$15,000
Prev Balance
($35,000)
$5,000
$45,000
Variable Costs
$20,000
$40,000
$60,000
$80,000
Fixed Costs
$75,000
$75,000
$300,000
Variable Costs
$500,000
$750,000
$1,000,000
$1,250,000
Fixed Costs
$600,000
$600,000
$600,000
$600,000
Total Costs
$1,100,000
$1,350,000
$1,600,000
$1,850,000
Gross Rev.
$950,000
$1,425,000
$1,900,000
$2,375,000
Cash Flow
($150,000)
$75,000
$300,000
$525,000
Net Profit
($200,000)
($125,000)
$175,000
$700,000
Sources
Fridson, Martin S., and Fernando Alvarez. Financial Statement Analysis: a Practitioner's Guide. New York: John Wiley & Sons, 2002. Print.
Friedlob, G. Thomas., and Franklin James Plewa. Understanding Return on Investment. New York: Wiley, 1996. Print.
Hofstrand, Don. "Understanding Cash Flow Analysis - File C3-14 December 2009." Iowa State University Extension. Web. 15 Mar. 2011.
.
Ko, P.h.D., James. "Online…
Sources
Fridson, Martin S., and Fernando Alvarez. Financial Statement Analysis: a Practitioner's Guide. New York: John Wiley & Sons, 2002. Print.
Friedlob, G. Thomas., and Franklin James Plewa. Understanding Return on Investment. New York: Wiley, 1996. Print.
Hofstrand, Don. "Understanding Cash Flow Analysis - File C3-14 December 2009." Iowa State University Extension. Web. 15 Mar. 2011.
<http://www.extension.iastate.edu/agdm/wholefarm/html/c3-14.html>.
Ko, P.h.D., James. "Online IRR NPV Calculator." DataDynamica Software Home Page. Web. 15 Mar. 2011. <http://www.datadynamica.com/irr.asp>.
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