Case Study Analysis: Gulf Shores Surgery Centers - Time Value Analysis

To: Senior Level Executive

From: [Your Name]

Date: August 22, 2024

Subject: Analysis of Financial Options for Gulf Shores Surgery Centers

This memo analyzes the financial options available to Gulf Shores Surgery Centers (GSSC) based on the information provided in Case #11 of Gapenski's Cases in Healthcare Finance.

Bank Selection:

Based on the goal of maximizing interest earned, BankSouth is the preferred choice for both the savings account and certificate of deposit (CD) due to their higher interest rates across all compounding frequencies (2.0% vs. 3.0% and 4.0% vs. 3.0%).

For the term loan, further analysis is needed to determine the best option depending on the specific repayment structure offered by each bank. We can compare the total interest paid under each option to make an informed decision.

Investment Analysis:

The wealthy donor's contributions will be invested in a CD at BankSouth with a 3.0% annual interest rate compounded semiannually. Due to the information provided, we cannot definitively calculate the exact future value of the investment at the time of the last donation. However, we can provide a formula to calculate it:

Future Value (FV) = Present Value (PV) * (1 + interest rate/compounding frequency)^(number of compounding periods * total years)

Where:

• PV = Initial investment + sum of annual donations (Year 1 to Year 12)
  • Initial investment = $250,000
  • Annual donations (Year 1 to Year 6) = $75,000/year * 6 years = $450,000
  • Annual donations (Year 7 to Year 12) = $150,000/year * 6 years = $900,000
  • Total PV = $250,000 + $450,000 + $900,000 = $1,600,000
• Interest rate = 3.0%
• Compounding frequency = 2 (semiannually)
• Number of compounding periods per year = 2 (since interest is compounded semiannually)
• Total years = Number of years from initial investment to last donation (Year 12)

Loan Analysis:

Unfortunately, the information provided is insufficient to definitively calculate the outstanding loan balance if Gary pays off the 5-year term loan at the end of Year 3. We would need the specific loan repayment structure offered by BankSouth, including the annual installment amount.

However, we can recommend calculating the Loan-to-Value (LTV) ratio to assess the financial feasibility of the renovation project. The LTV ratio compares the outstanding loan balance to the estimated project cost. A lower LTV ratio indicates a more favorable financial position.

Building Fund Analysis:

To calculate the future value of the building fund needed to cover the projected renovation costs, we can use the Future Value of an Annuity (FVA) formula:

FVA = Payment amount * ((1 + interest rate)^number of periods - 1) / interest rate

1. How To Use the Future Value Formula - Investopedia

www.investopedia.com

Where:

• Payment amount = Annual contribution to the building fund ($5,000,000 for the first 4 years and an unknown fixed amount for the following 3 years)
• Interest rate = We need to determine the appropriate interest rate based on expected investment returns.
• Number of periods = Total number of years for contributions (4 years for initial contributions + 3 years for unknown fixed contributions)

Explanation:

Next Steps:

1. Gather additional information on the specific repayment structure for the term loan options offered by both banks.
2. Determine an appropriate interest rate for the building fund based on expected investment returns.
3. Calculate the outstanding loan balance for the early payoff scenario (Year 3).
4. Calculate the future value of the investment at the time of the last donation (Year 12).
5. Calculate the future value of the building fund needed to cover renovation costs.
6. Based on the above calculations, recommend the most suitable bank for each financial need (savings account, CD, term loan) and present a plan for managing the building fund.

Potential Next Steps

1. Contact BankSouth to obtain the exact repayment schedule for the 5-year term loan.
2. Research historical investment returns or consult with a financial advisor to estimate a suitable interest rate for the building fund.

Provisional Calculations (Based on Assumptions)

Assuming the following:

• Loan Repayment Structure: Equal annual installments for the 5-year term loan.
• Building Fund Interest Rate: 4% (conservative estimate)

1. Loan Repayment Calculation:

• Loan Amount: $250,000
• Interest Rate: Assuming it's the same as the term loan rate (4%)
• Loan Term: 5 years
• Repayment Frequency: Annual

Using a financial calculator or Excel's PMT function, we can calculate the annual payment.

2. Building Fund Calculation:

• Annual Contribution: $5,000,000 for the first 4 years, then a fixed amount for the following 3 years.
• Interest Rate: 4%
• Time Period: 7 years

Using the Future Value of an Annuity formula, we can calculate the future value of the building fund.

This analysis provides a framework for making informed financial decisions for Gulf Shores Surgery Centers.

Follow-up Questions

Can you please arrange the entire memo from the introduction to the conclusion? Thank you!