Medical Proposals, One for a Case Study

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Internal rate of return is 72%.

Conversely, Proposal 2 operates at a $150,000 deficit for its first year of operation. Totals costs for the CT scan equipment are $1.1 million ($500,000 variable costs from $500 per patient and $600,000 fixed cost for insurance and equipment leases) while revenue for year one is only $950,000 (from per visit payments of $950 per patient). One thousand patients are expected in year one of operation. The initial cost of investment for Proposal 2 was $50,000 putting the total budget deficit for Proposal 2,-year 1 at $200,000. Total costs for year two are $1,350,000 while gross revenue reaches $1,425,000. This presents a positive cash flow of $75,000 however because of the loss of $200,000 in year one, net profits for year two are negative at $125,000 ($200,000 [year one net profit] - $75,000 [year two cash flow]).

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Like Proposal 1, Proposal 2 becomes profitable over the baseline in year three. Total costs for operation are $1.6 million while profits reach $1.9 million equally a positive cash flow of $300,000. This allows the medical center to recoup it's initial investment of $50,000 for the lease of the CT scanners as well as pay off the debt for the previous two years or $125,000 equaling net profits of $175,000. Year four of operation for Proposal 2 has total costs at $1.85 million while the gross revenue for the year is $2.375 million equaling a positive cash flow of $525,000. Combined with previous year's net profit of $175,000 total net profit for four years equals $700,000.

Proposal 1

Investment

$15,000

Break Even Point

$50,000

Variable costs

$40

per patient

ROI

Fixed costs

$75,000

per year

Net Profits

$85,000

Patient.....

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