Part 1 - Capital Investment Decisions
The ABC Hospital is considering the purchase of a new item of medical equipment. The decision has come down to a choice between Machine A and Machine B. Machine A has a cost of $120,000 and has an expected economic life of five years, after which it has a no scrap value. The cash flowed income for the next five years from this machine are $45,500, $44,000, $42,000, $40,000 and ($5,000). Note: ($5,000) is the same as to -$10,000.Machine B has an initial cash outlay of $110,000 with an economic life of five years and no scrap value. The cash flowed income from this machine are expected to be ($8,000), $33,000, $46,000, $60,000 and $65,000.
ABC Hospital requires an Internal Rate of Return of 13%. It also prefers projects that pay for themselves within three years. The cost of capital of 10%.
1. Evaluate the relative merits of these machines using:
a) The actual (or nominal) cash flow
b) The payback period (PP)
c) Net present value (NPV)
d) Internal rate of return (IRR)
2. Which machine is the better investment? Explain your answer and your preferred method of evaluating the investment merits of these machines.
Part 2 - Financial Statements and Analysis
To access the Barwon Health Annual Reports, please refer to attachments to Assignment 2 on LO. Use the Barwon Health Annual Reports
1. Compare the ‘financial summary’ (pages 18-19) to the ‘Financial Statements’ (start at page 49) reported in the Barwon Health Group’s 2018-19 Annual Report. Which set of information did you find most useful and why?
2. Using the 2018-19 annual report compare the 2018 and 2019 comprehensive results for the parent entity reported in the Comprehensive Operating Statement for the financial year ended 30 June 2019 (page 49). Please ensure your comments are brief, concise, and to the point.( Hint: Vertical and Horizontal analysis may be helpful)
What other information would be useful in providing context for the financial outcomes? Is this information available in the annual report?
3. Construct a graph to show the following trends (for Revenue, Expenses and Patient WEISS Activity) from the Barwon Health Annual Reports2013-14 to 2018-19: (Note you will need to complete the following tables for Revenue, Expenses and WEISS Activity). Interpret the Graph.
4. Using the information gained in Question 3, discount the combined expenses (Employee Benefits + Non Salary Labour Costs + Supplies and Consumables + Other Expenses) using one of the following indexes (source ABS (2019).
Health Index All Groups CPI
Jun-2011 99.4 99.2
Jun-2012 103.0 100.4
Jun-2013 109.3 102.6
Jun-2014 114.5 105.9
Jun-2015 120.3 107.1
Jun-2016 126.1 108.6
Jun-2017 131.1 111.0
Jun-2018 135.6 113.8
Jun-2019 139.2 115.3
5. Create a new graph incorporating nominal expenses, discounted expenses and total WEIS patient activity for each year. (Hint: a single graph, use both the primary and secondary y axes.)
• Why discount the expenses?
• Which index did you choose and why?
• Does discounting the expenditure alter your interpretation of the past expenditure and activity (compared to question 3)?
6. What other performance indicators (e.g. KPIs – page 42-44, 2018-19 Annual Report) may be useful to measure? Why?
Part 3 - Health Care Funding Models
These are short answer questions (e.g. 2 or 3 paragraphs) and not essay questions. While dot points can be used where appropriate (e.g., for lists), formal sentence structure and grammar are expected.
1. Describe activity based funding as it is applied in the Australian health sector.
2. What is the role of the Independent Hospital Pricing Authority in activity base funding?
3. Is it reasonable to assume that the (average) National Efficiency Price should apply equally to all states within Australia? Outline the assumptions which support your answer.
4. Casemix funding relies upon the average length of stay. Describe the problems of using the average length of stay for funding purposes?