San Joaquin Community Hospital is a nonprofit hospital operated by the county. The hospital’s administrator is considering a proposal to open a new outpatient clinic in the nearby city of San Marco. The administrator has made the following estimates pertinent to the proposal.
1. Construction of the clinic building will cost $780,000 in two equal installments of $390,000, to be paid at the end of 20x0 and 20x1. The clinic will open on January 2, 20x2. All staffing and operating costs begin in 20x2.
2. Equipment for the clinic will cost $150,000, to be paid in December of 20x1.
3. Staffing of the clinic will cost $800,000 per year.
4. Other operating costs at the clinic will be $200,000 per year.
5. Opening the clinic is expected to increase charitable contributions to the hospital by $250,000 per year.
6. The clinic is expected to reduce costs at San Joaquin Community Hospital. Annual cost savings at the hospital are projected to be $1,000,000.
7. A major refurbishment of the clinic is expected to be necessary toward the end of 20x5. This work will cost $180,000.
8. Due to shifting medical needs in the county, the administrator doubts the clinic will be needed after 20x9.
9. The clinic building and equipment could be sold for $290,000 at the end of 20x9.
10. The hospital’s hurdle rate is 12 percent.
1. Compute the cash flows for each year relevant to the analysis.
2. Prepare a table of cash flows, by year, similar to Exhibit 16–4.
3. Compute the net present value of the proposed outpatient clinic.
4. Should the administrator recommend to the hospital’s trustees that the clinic be built? Why?
5. Construct an Excel spreadsheet to solve requirements. (1), (2) and (3) above. Show how the solution will change if the following information changes: staffing will cost $790,000 per year, and the increased charitable contributions will be $265,000.