Question Details

HSA 525
WEEK 10

HSA 525 Chapter 10 Homework Assignment Exercises
	Assignment Exercises 22-1 on page 400 
	Assignment Exercises 23-1, 23-2, and 23-3 on pages 400 through 402

Practice Exercise 23-1: Cost of Leasing
A cost ofleasing table is reproduced below.
Required
Using the appropriate table from the Chapter 12 Appendices, record the present value factor
at 6% for each year and compute the present value cost ofleasing.
Cost of Leasing: Suburban Clinic-Comparative Present Value
Not-for-Profit Cost of Leasing: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Net Cash Flow (11,000) (11,000) (11,000) (11,000) (11,000)
Present value factor (at 6%)
Present value answer =
Present value cost ofleasing =
.~Assignment Exercise 23-1: Cost of Owning and Cost of Leasing
Cost of owning and cost ofleasing tables are reproduced below.
Chapter 23 401
Required
Using the appropriate table from the Chapter 12Appendices, record the present value factor
at 10% for each year and compute the present value cost of owning and the present
value ofleasing. Which alternative is more desirable at this interest rate? Do you think your
answer would change if the interest rate wassix percent instead of ten percent?
Cost of Owning: Anywhere Clinic-Comparative Present Value
For-Profit Cost of Owning: Year0 Year 1
Net Cash Flow (48,750) 2,500
Present value factor
Present value answers =
Present value cost of owning =
Year2 Year3 Year4 Year5
2,500 2,500 2,500 5,000
Cost of Leasing: Anywhere Clinic-Comparative Present Value
Line
#
For-Profit Cost
of Leasing: Year0 Year 1 Year 2 Year3 Year4 Year5
19 Net Cash Flow (8,250) (8,250) (8,250) (8,250) (8,250)
20 Present value factor
21 Present value answers =
22 Present value cost ofleasing = *"Assignment Exercise 23-2
Great Docs, a three-physician practice with twooffice sites, is considering whether to buy or
lease a new computer system.Currently they own a low-tech (and low-cost)information system.
The new system will have to meet all government specifications for an electronic
health record system and will also have to connect the two office sites. It will be considerably
more sophisticated than the current hardware and software and thus willrequire training
for office staff, clinical staff, and the physicians. Everyone agrees there willbe a learning
curve in order to reach the system's full potential.
Doctor Smith, the majority owner of the practice, wants to buy a medical records system
from Sam's Club. He argues that the package is supposed to electronically prescribe, track
billings, set appointments, and keep records, so it should meet their needs. The cost of the
first installed systemis supposed to be $25,000, plus $10,000 for each additional system.*
The doctors are not sure if this means $25,000 for one office site plus $10,000 for the (connected)
second office site for a total of $35,000, or if this means $25,000 for the first installed
systemplus $10,000 each for three more doctors, for a total of$55,000. There is also
supposed to be $4,000 to $5,000 in maintenance costs each year as part of the purchased
*Details about this system were announced in a WaUStreetJournal story as quoted in Chapter 20. The prices
in this exercise are fictitous.
402 EXAMPLES AND EXERCISES, SUPPLEiVIEl:TAL MATERIALS, AND SOLUTIONS
package. Doctor Smith proposes to pay twenty percent down and obtain a five-year installment
loan from the local bank for the remaining eighty percent at an interest rate of eight
percent.
Doctor Jones, the youngest of the three physicians, has been recently added to the practice.
A computer nerd, he wants to lease a complete system from the small company his college
roommate began last year. While he has received a quote of $20,000 for the entire
system including first year maintenance, it does not meet the government requirements for
an electronic health record system. Consequently, the other two doctors have outvoted Doctor
Jones and this system will not be seriously considered.
Doctor Brown, the usual peace-maker between Doctor Smith and Doctor Jones, wants to
lease a system. He argues that leasing will place the responsibility for upgrades and maintenance
upon the lessor company, and that removing the responsibilities of ownership is advantageous.
He has received a quote of $20,000 per year for a five-year lease that includes
hardware and software for both offices, that meets the government requirements for an
electronic health record system, and that includes training, maintenance, and upgrades.
Required
Summarize the costs to the practice of owning a system (per Doctor Smith) versus leasing
(per Doctor Brown). Include a computation of comparative present value. (Refer to Assignment
23-1 for setting up a comparative present value table.) *Assignment Exercise 23-3
Metropolis Health System has to do something about their ambulance situation. They have
to (a) buy a new ambulance; (b) lease a new one; or (c) renovate an existing ambulance
that MHS already owns. Rob Lackey, the Assistant Controller, has been asked to gather pertinent
information in order to make a decision. So far Rob has found these facts:
1. It will cost at least $250,000 to purchase a new ambulance, although the cost varies
widely depending upon the quantity and sophistication of the emergency equipment contained
on the vehicle.
2. In order to renovate the existing vehicle, it will cost at least $100,000 to purchase and
install a new "box." (In other words, a new emergency-equipped body is installed on the existing
chassis.) Rob has found this existing ambulance has an odometer reading of 80,000
miles. The vehicle will also need a new fuel pump and new tires, but he believes these items
would be recorded as repair and maintenance operating expenses and thus would not be
included in his calculations.
3. Lease terms for ambulances also vary widely, but so far Rob believes a cost of $60,000
per year is a ball-park figure.
Required
How much more information should Rob have before he begins to make any calculations?
Make a list. Which alternative do you believe would be best? Give your reasons