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Medical Proposals, One For A Case Study

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]).

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

Balance ($150,000)
$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 used in this document:
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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