1. 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%u2019s developers claim that referrals alone will make the center a financial winner of the hospital.

Cautious analysis in the comptroller%u2019s office argue that the startup costs of the center and its annual cash outflows (including insurance) will be a
major drain on the hospital%u2019s overall cash flow.

Initial cash outflows for the center are projected as follows: $300000 for equipment furniture and fixtures; and $75000 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 $125000 per year in net cash flows from increased admissions to the hospital. Annual operating expenses of the center will
be $200000.

The hospital%u2019s 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 $50000.

Is the emergency center a wise use of the hospital%u2019s limited funds? You may use the following framework to set up the problem (10 points).

YEAR 0 1 2 3 4 5 6 7 8 9 10
Using
Cash Direct Cash Indirect Cash Net Cash

Outflow Inflow Inflow Flow