You are CEO of Cactus Spine Medical Center in rural southeastern California. The 105-bed hospital has been operating in the same building since opening in 1957. In 2005, it undertook a $17,000,000 renovation funded with a bond issue with a level annual payment over 20 years at 5.25% interest.

The building is beginning to show its age after nearly 15 years, and it is facing about $5,000,000 in renovations, including a new roof, generator, chillers, and boilers, along with structural upgrades noted after a recent minor earthquake. The latest financial statements for the hospital as of its fiscal year-end on December 31, 2020, are included in the Cactus Spine Medical Center Financials document (pictured).

The hospital pondered refinancing its debt a year ago and received a tentative Baa rating from Moody's. They still qualify for that rating today. As a nonprofit, that may help you determine a cost of capital for your project, should you decide to undertake it.

Regulatory inspectors have warned you that if you do not have a plan in place to remedy the seismic building safety issues noted here within the next year, they will pursue revocation of the hospital license. The Joint Commission made similar comments in its re-accreditation visit this past year. So you are likely spending that $5 million. How do you determine the ROI of a project like this? Maybe you just want to "punt" and sell to Primary Health Corporation since they have expressed interest in acquiring your facility at a price of about $3 million and paying off the hospital debt. (HINT: Don't do that.)

1. What would you recommend to the governing board about making the additional investment?
2. Why?

 

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Cactus Spine Medical Center Financial Statements as of Fiscal Year end - 12/31/2020 Balance Sheet Cash Marketable Securities A/R Inventory Other Current Assets Current Assets Property Plant & Equipment less: Accumulated Depreciation Net PP&E Long-Term Investments Total Non Current Assets Total Assets Accounts Payable Salaries Payable Other Current Liabilities Current Liabilities Long Term Debt Total Liabilities Net Assets $5,869,572 1,967,442 6,695,412 811,758 246,758 $15,590,942 73,704,853 54,392,896 19,311,957 7,746,347 $27,058,304 $42,649,246 $1,002,406 459,687 3,259,872 $4,721,965 19,334,219 24,056,184 18,593,062 Total Liabilities and Net Assets $42,649,246 Income Statement Net Patient Revenues Salaries & Wages Benefits Supplies Purchased Services Depreciation Interest Other Operating Expenses Total Operating Expenses Operating Income Investment Income Contribution Income Net Income $41,053,675 $21,199,110 5,982,255 8,497,718 116,524 3,254,962 1,843,321 194,200 $41,088,090 -$34,415 139,174 74,561 $179,320 Cactus Spine Medical Center Financial Statements as of Fiscal Year end - 12/31/2020 Balance Sheet Cash Marketable Securities A/R Inventory Other Current Assets Current Assets Property Plant & Equipment less: Accumulated Depreciation Net PP&E Long-Term Investments Total Non Current Assets Total Assets Accounts Payable Salaries Payable Other Current Liabilities Current Liabilities Long Term Debt Total Liabilities Net Assets $5,869,572 1,967,442 6,695,412 811,758 246,758 $15,590,942 73,704,853 54,392,896 19,311,957 7,746,347 $27,058,304 $42,649,246 $1,002,406 459,687 3,259,872 $4,721,965 19,334,219 24,056,184 18,593,062 Total Liabilities and Net Assets $42,649,246 Income Statement Net Patient Revenues Salaries & Wages Benefits Supplies Purchased Services Depreciation Interest Other Operating Expenses Total Operating Expenses Operating Income Investment Income Contribution Income Net Income $41,053,675 $21,199,110 5,982,255 8,497,718 116,524 3,254,962 1,843,321 194,200 $41,088,090 -$34,415 139,174 74,561 $179,320