Financial Management
Homework #5
Harper Hospital
Solve each problem using Excel. Show both the solution and the formula you used by putting an apostrophe in front of the equals sign. Be sure to write a sentence explaining your answer for each problem. (Note: There is no template for this assignment.)
1. Harper Hospital is considering bids from two contractors to renovate its endocrinology unit in order to enhance efficiency and increase patient satisfaction. Contractor 1 bid $260,000 for the job. The renovations would be guaranteed for 15 years with annual maintenance costs of $11,500 per year. Contractor 2 bid $305,000 for the job and would also guarantee the renovations for 15 years. The annual maintenance costs would be $7,500 per year if Harper Hospital selected Contractor 2. All maintenance costs are paid at the end of each year.
a. Assuming Harper Hospital uses a discount rate of 5.50%, which contractor should the hospital choose?
b. If Contractor 2 instead offered to guarantee the renovations for 16 years at a cost of $7,500 per year, which contractor should the hospital choose now, assuming all else equal?
2. Several years ago, the hospital needed additional space and issued bonds to finance the purchase of a new building. Each bond has a face value of $30,000, a 2.65% coupon rate, and a maturity of 20 years. Interest is paid semiannually. The current market interest rate is 3.20%. What is the most you’d be willing to pay for one of these bonds today if they were issued exactly:
a. Three years ago?
b. Eight years ago?
3. Harper Hospital is planning to construct a new pharmacy and gift shop in order to better serve patients and visitors to the hospital. The construction will cost $320,000 and is expected to last four years without the need for any additional renovations or maintenance. The new pharmacy and gift shop will generate $65,000 in revenues in year one, and that amount is projected to increase by 3.00% each year thereafter. Assuming a discount rate of 2.50%, will the hospital make money or lose money on the new pharmacy and gift shop?
4. The hospital took out a $2,000,000 mortgage to facilitate the construction of a new sports performance center. The term of the mortgage is 30 years, the annual interest rate is 4.75%, and payment is due on the first day of each month. What is the hospital’s monthly mortgage payment?
5. Harper Hospital is trying to decide whether to lease or purchase new equipment for its dermatology unit. The lease would require payments of $2,650 at the beginning of each month for five years. The hospital would also have to pay a delivery fee of $3,000 at the start of the lease, and an additional $1,500 pick-up fee at the end of the lease. (Hint: assume monthly compounding of the pick-up fee.) By contrast, the purchase price is $150,000; however, the hospital was able to work out a payment plan with the vendor. Instead of paying the full cost upfront, the hospital would make a $60,000 payment upfront and would then pay the remaining balance in equal monthly installments over the next 12 months. Payments would be due at the end of each month. If purchased, the equipment would have a useful life of five years and no salvage value. The hospital uses a discount rate of 2.35%. From a financial perspective, should the hospital lease or purchase the equipment for the dermatology unit?
6. Harper Hospital needs to purchase a new fleet of ambulances and is debating between two options. Option A will cost $3,500,000 upfront and will require maintenance costs of $28,000 per year. Option A is estimated to have a useful life of four years. Option B, on the other hand, is estimated to have a useful life of six years and will cost $5,000,000 upfront. Maintenance costs for Option B will be $0 in year 1 and year 2, $15,000 in year 3 and year 4, and $22,500 in year 5 and year 6. The hospital uses a discount rate of 3.10%. Which option should the hospital choose?