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Finance Homework
11.1 Entries for the Warren Clinic 2008 income statement are listed below in alphabetical
order. Reorder the data in the proper format.
Bad debt expense $ 40,000
Depreciation expense 90,000
General/administrative expenses 70,000
Interest expense 20,000
Interest income 40,000
Net income 30,000
Other revenue 10,000
Patient service revenue 440,000
Purchased clinic services 90,000
Salaries and benefits 150,000
Total revenues 490,000
Total expenses 460,000
11.2 Consider the following income statement:
BestCare HMO
Statement of Operations
Year Ended June 30, 2008
(in thousands)
Revenue:
Premiums earned $26,682
Coinsurance 1,689
Interest and other income 242
Total revenues $28,613
Expenses:
Salaries and benefits $ 15,154
Medical supplies and drugs 7,507
Insurance 3,963
Provision for bad debts 19
Depreciation 367
Interest 385
Total expenses $27,395
Net income $ 1,218
a. How does this income statement differ from the one presented in Table 11.1?
b. Did BestCare spend $367,000 on new fixed assets during fiscal year 2008? If not, what is the economic
rationale behind its reported depreciation expense?
c. Explain the provision for bad debts entry.
d. What is BestCare’s total margin? How can it be interpreted?
11.3 Consider this income statement:
Green Valley Nursing Home, Inc.
Statement of Income
Year Ended December 31, 2008
Revenue:
Resident services revenue $3,163,258
Other revenue 106,146
Total revenues $3,269,404
Expenses:
Salaries and benefits $1,515,438
Medical supplies and drugs 966,781
Insurance and other 296,357
Provision for bad debts 110,000
Depreciation 85,000
Interest 206,780
Total expenses $3,180,356
Operating income $ 89,048
Provision for income taxes 31,167
Net income $ 57,881
a. How does this income statement differ from the ones presented in Table 11.1 and Problem 11.2?
b. Why does Green Valley show a provision for income taxes while the other two income statements did not?
c. What is Green Valley’s total (profit) margin? How does this value compare with the values for Park Ridge
Homecare Clinic and BestCare?
d. The before-tax profit margin for Green Valley is operating income divided by total revenues. Calculate Green
Valley’s before-tax profit margin. Why may this be a better measure of expense control when comparing an
investor-owned business with a not-for-profit business?
12.1 Middleton Clinic had total assets of $500,000 and an equity balance of $350,000 at the end of 2007. One year later, at the end of 2008, the clinic had $575,000 in assets and $380,000 in equity. What was the clinic’s dollar growth in assets during 2008, and how was this growth financed?
12.2 San Mateo Healthcare had an equity balance of $1.38 million at the beginning of the year. At the end of the year, its equity balance was $1.98 million. Assume that San Mateo is a not-for-profit organization. What was its net income for the period?
12.3 Here is financial statement information on four not-for-profit clinics:
| Pittman | Rose | Beckman | Jaffe | |
| December 31, 2007: | ||||
| Assets | $ 80,000 | $ 100,000 | g | $ 150,000 |
| Liabilities | 50,000 | d | $ 75,000 | j |
| Equity | a | 60,000 | 45,000 | 90,000 |
| December 31, 2008: | ||||
| Assets | b | 130,000 | 180,000 | k |
| Liabilities | 55,000 | 62,000 | h | 80,000 |
| Equity | 45,000 | e | 110,000 | 145,000 |
| During 2008: | ||||
| Total revenues | c | 400,000 | i | 500,000 |
| Total expenses | 330,000 | f | 360,000 | l |
Fill in the missing values labeled a through l.
5.1 Assume that the managers of FortWinston Hospital are setting the price on a new outpatient service. Here are the relevant data estimates:
Variable cost per visit – $5.00
Annual direct fixed costs – $500,000
Annual overhead allocation – $50,000
Expected annual utilization – 10,000 visits
a. What per visit price must be set for the service to break even? To earn an annual profit of $100,000?
b. Repeat Part a, but assume that the variable cost per visit is $10.
c. Return to the data given in the problem. Again repeat Part a, but assume that direct fixed costs are
$1,000,000.
d. Repeat Part a assuming both a $10 variable cost and $1,000,000 in direct fixed costs.
6.1 Consider the following 2008 data for Newark General Hospital (in millions of dollars):
| Simple Budget | Flexible Budget | Actual Results | |
| Revenues | $4.7 | $4.8 | $4.5 |
| Costs | 4.1 | 4.1 | 4.2 |
| Profit | 0.6 | 0.7 | 0.3 |
a. Calculate and interpret the two profit variances.
b. Calculate and interpret the two revenue variances.
c. Calculate and interpret the two cost variances.
d. How are the variances related?
9.1 Find the following values for a single cash flow:
a. The future value of $500 invested at 8 percent for one year
b. The future value of $500 invested at 8 percent for five years
c. The present value of $500 to be received in one year when the opportunity cost rate is 8 percent
d. The present value of $500 to be received in five years when the opportunity cost rate is 8 percent
10.1 Great Lakes Clinic has been asked to provide exclusive healthcare services for next year’s World Exposition. Although flattered by the request, the clinic’s managers want to conduct a financial analysis of the project. An up-front cost of $160,000 is needed to get the clinic in operation. Then, a net cash inflow of $1 million
is expected from operations in each of the two years of the exposition. However, the clinic has to pay the organizers of the exposition a fee for the marketing value of the opportunity. This fee, which must be paid at the end of the second year, is $2 million.
a. What are the net cash flows associated with the project?
b. What is the project’s IRR?
c. Assuming a project cost of capital of 10 percent, what is the project’s NPV?
Ethics in Criminal Justice: CJ_402
Part A
1. Case Study: Use the Internet to research the case of Tennessee v. Garner, 471 U.S. 1: In a narrative format, in a minimum of 400 words, discuss the key facts and critical issues presented in the case.
Part B
1. After reading Chapter 9 of your text, discuss the difference between human rights, legal rights, and moral rights.
2. Apply these three to the Tennessee v. Garner case, discussing the ramifications of each.
3. Research the Prima Facie Duties proposed by author W.D. Ross. In the Garner case, what duties of fidelity did the officers owe the victim, and what duties of justice were breached?
Part C
1.Executive Decisions
If you were the Chief of the Memphis Police Department during the Tennessee v. Garner case, what ethical dilemmas do you think should be addressed immediately upon the Supreme Court’s decision?
Homework Solutions Ch12 ESTIMATING CASH FLOWS ON CAPITAL BUDGETING PROJECTS
Suppose you sell a fixed asset for $109,000 when it’s book value is $129,000. If your company’s marginal tax rate is 39%, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
Your Company is considering a new project that will require $1,000,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $150,000 using straight-line depreciation. The cost of capital is 13%, and the firm’s tax rate is 34%. Estimate the present value of the tax benefits from depreciation.
You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $14,000 to purchase and which will have OCF of -$1,200 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $20,000 to purchase and which will have OCF of -$650 annually throughout that vehicles expected four-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 12 percent, which one should you choose?
You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $57,000, has a five-year life, and has an annual OCF (after tax) of -$10,000 per year. The Keebler CookieMunster costs $90,000, has a seven-year life, and has an annual OCF (after tax) of -$8,000 per year. If your discount rate is 12 percent, what is each machine’s EAC?
You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $80 initially, and then $125 per year in maintenance costs. Machine B costs $150 initially, has a life of three years, and requires $100 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 12% and the tax rate is zero.
KADS, Inc. has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of 3 years, a $75,000 estimated resale value, and falls under the MACRS 7-Year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the cash flows for this project be?
Your firm needs a computerized machine tool lathe which costs $50,000, and requires $12,000 in maintenance for each year of its 3 year life. After 3 years, this
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machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 35% and a discount rate of 12%. Calculate the depreciation tax shield for this project in year 3.
If the lathe in the previous problem can be sold for $5,000 at the end of year 3, what is the after tax salvage value?
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in NWC (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 40 percent. What will the cash flows for this project be?
You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $400 per unit and
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sales volume to be 1000 units in year 1; 1500 units in year 2; and 1325 units in year 3. The project has a three-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets which will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?
Continuing the previous problem, what is the operating cash flow for the project in year 2?
You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a 3 year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets which will be depreciated straight-line to zero over the 3 year project life. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 20% of the projected sales during the coming year. The tax rate is 34% and the required return on the project is 10%. What will the cash flows for this project be?