Effectively gather financial and market information to guide strategic decision making and improve patient outcomes.
Read Case #11 (pages 79-81) from Gapenski’s Cases in Healthcare Finance – “Gulf Shores Surgery Centers”
.
Prepare your response in memo format, suitable for presentation to a senior level executive. All Excel work should be imported into the memo in table format (in the body of the document) or enclosed as an Appendix within the same document.
Utilize the case model provided by the publisher to respond to the questions below.
- Which bank should Gary choose for a saving account, which bank for a certificate of deposit, and which bank for a term loan?
- Gary will invest the donations from a wealthy investor in CDs. How much will the Center have accumulated on the day of the last donation? (Use the CD interest rate offered by the bank you selected for a CD in question 1.)
- If the Center takes out a 5-year term loan that would be repaid in equal annual installments, how much will it owe to BankSouth if Gary decides to pay off the loan early, at the end of the third year? (Use the term loan interest rate offered by the bank you selected for a term loan in question 1.)
Copyright 2018. Health Administration Press.
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
C AS E
GULF SHORES
S U RG E RY C E N T E RS
11
TIME VALUE ANALYSIS
Gary Hudson was born and raised in Pensacola, Florida. He obtained his
bachelor’s degree in business from Florida State University, where he enrolled
in the Naval Reserve Officers Training Corps program. After graduation,
he received a commission in the US Marine Corps. Following his release
from active duty, Gary used his GI Bill benefits to obtain a master’s degree
in health services administration from the University of Florida. His first
job in healthcare was as a special projects coordinator/financial analyst at
a large Miami hospital. He enjoyed his work there, but his ultimate goal
was to return to Pensacola as the manager of a small healthcare business,
where he would have more responsibility and authority. After five years in
Miami, Gary became the chief operating and financial officer of Gulf Shores
Surgery Centers, an investor-owned chain of ambulatory surgery centers
with six locations in Florida’s Panhandle.
Immediately after assuming his new position, Gary found himself facing several decisions. First, Gary had to select a bank or banks to meet the
financial needs of Gulf Shores. He has approached two local banks—Sun
Trust and BankSouth—about the interest rates they offer on a savings account
and a certificate of deposit (CD) as well as the rate charged on a term loan.
Sun Trust and BankSouth offer the same interest rate on each financial
product and only differ in the frequency of compounding (exhibit 11.1).
Second, a wealthy patient was so impressed with the care she received at
Gulf Shores that she decided to make a series of donations to the facility. She
will donate $75,000 a year for the first six years (t = 1 through t = 6, where
t = time) and $150,000 annually for the following six years (t = 7 through
t = 12). The first deposit will be made a year from today (t = 1). In addition,
© Fou nd at ion of ACHE, 2018. Repr oduc t i o n w i t h o u t p e r mi s s i o n i s p r o h i b i t e d .
EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 5/25/2023 1:09 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS
AN: 1792719 ; George Pink.; Gapenski’s Cases in Healthcare Finance, Sixth Edition
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79
80
C ase s in Health care F in a n c e
she has just written a check for $250,000, which Gary will invest immediately
(t = 0). Gary will invest all of the donations in a CD as they become available. CDs are generally offered in maturities of six months to ten years, and
interest can be handled in one of two ways: the investor (buyer) can receive
periodic interest payments, or the interest can automatically be reinvested
in the CD. In the latter case, the buyer receives no interest during the life
of the CD but receives the accumulated interest plus the principal amount
at maturity. Because the goal of this investment is to accumulate funds for
future use, as opposed to generating current income, all interest earned on
the CD would be reinvested.
Third, Gulf Shores may launch substantial building renovations. In this
circumstance, it would be forced to borrow $250,000 from a bank. Gary is
considering two options for a term loan:
1.
2.
A five-year term loan that would be repaid in equal annual
installments, with the first payment due at the end of Year 1.
Gary hopes to pay off the loan early—at the end of Year 3.
A seven-year loan that would be repaid in annual installments of
differing amounts, with the first payment due at the end of Year
1. For the first three years of the loan, the annual installment
would be projected cash surpluses ($25,000 at the end of Year 1,
$50,000 at the end of Year 2, and $75,000 at the end of Year 3).
For the final four years of the loan, the annual installment would
be a fixed (but currently unspecified) cash flow, X, at the end of
each year from Year 4 through Year 7.
Finally, Gulf Shores has a board-designated building fund to pay for
projected facility renovations starting in eight years and lasting for four years
(at t = 8, 9, 10, and 11). Current building renovation costs are estimated to be
$14,500,000 a year, but they are expected to increase at a rate of 3.5 percent
a year. So far, Gulf Shores has accumulated $15,000,000 (at t = 0). Gary’s
long-run financial plan is to add $5,000,000 in each of the next four years
(at t = 1, 2, 3, and 4). Then, he plans to make equal annual contributions in
each of the following three years (t = 5, 6, and 7).
All of the decisions Gary faces involve time value analysis.
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C ase 11 : Gu lf S h o re s S u rg e r y C e n te rs
Nominal
Bank
Sun Trust
BankSouth
Product
Compounding
Interest Rate
Savings account
Weekly
2.0%
Certificate of deposit
Monthly
3.0%
Term loan
Quarterly
4.0%
Savings account
Daily
2.0%
Certificate of deposit
Annually
3.0%
Term loan
Semiannually
4.0%
81
EXHIBIT 11.1
Interest Rates on Three
Financial Products
EBSCOhost – printed on 5/25/2023 1:09 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
EBSCOhost – printed on 5/25/2023 1:09 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Copyright 2018. Health Administration Press.
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
C AS E
GULF SHORES
S U RG E RY C E N T E RS
11
TIME VALUE ANALYSIS
Gary Hudson was born and raised in Pensacola, Florida. He obtained his
bachelor’s degree in business from Florida State University, where he enrolled
in the Naval Reserve Officers Training Corps program. After graduation,
he received a commission in the US Marine Corps. Following his release
from active duty, Gary used his GI Bill benefits to obtain a master’s degree
in health services administration from the University of Florida. His first
job in healthcare was as a special projects coordinator/financial analyst at
a large Miami hospital. He enjoyed his work there, but his ultimate goal
was to return to Pensacola as the manager of a small healthcare business,
where he would have more responsibility and authority. After five years in
Miami, Gary became the chief operating and financial officer of Gulf Shores
Surgery Centers, an investor-owned chain of ambulatory surgery centers
with six locations in Florida’s Panhandle.
Immediately after assuming his new position, Gary found himself facing several decisions. First, Gary had to select a bank or banks to meet the
financial needs of Gulf Shores. He has approached two local banks—Sun
Trust and BankSouth—about the interest rates they offer on a savings account
and a certificate of deposit (CD) as well as the rate charged on a term loan.
Sun Trust and BankSouth offer the same interest rate on each financial
product and only differ in the frequency of compounding (exhibit 11.1).
Second, a wealthy patient was so impressed with the care she received at
Gulf Shores that she decided to make a series of donations to the facility. She
will donate $75,000 a year for the first six years (t = 1 through t = 6, where
t = time) and $150,000 annually for the following six years (t = 7 through
t = 12). The first deposit will be made a year from today (t = 1). In addition,
© Fou nd at ion of ACHE, 2018. Repr oduc t i o n w i t h o u t p e r mi s s i o n i s p r o h i b i t e d .
EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 5/25/2023 1:09 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS
AN: 1792719 ; George Pink.; Gapenski’s Cases in Healthcare Finance, Sixth Edition
Account: s4264928.main.eds
79
80
C ase s in Health care F in a n c e
she has just written a check for $250,000, which Gary will invest immediately
(t = 0). Gary will invest all of the donations in a CD as they become available. CDs are generally offered in maturities of six months to ten years, and
interest can be handled in one of two ways: the investor (buyer) can receive
periodic interest payments, or the interest can automatically be reinvested
in the CD. In the latter case, the buyer receives no interest during the life
of the CD but receives the accumulated interest plus the principal amount
at maturity. Because the goal of this investment is to accumulate funds for
future use, as opposed to generating current income, all interest earned on
the CD would be reinvested.
Third, Gulf Shores may launch substantial building renovations. In this
circumstance, it would be forced to borrow $250,000 from a bank. Gary is
considering two options for a term loan:
1.
2.
A five-year term loan that would be repaid in equal annual
installments, with the first payment due at the end of Year 1.
Gary hopes to pay off the loan early—at the end of Year 3.
A seven-year loan that would be repaid in annual installments of
differing amounts, with the first payment due at the end of Year
1. For the first three years of the loan, the annual installment
would be projected cash surpluses ($25,000 at the end of Year 1,
$50,000 at the end of Year 2, and $75,000 at the end of Year 3).
For the final four years of the loan, the annual installment would
be a fixed (but currently unspecified) cash flow, X, at the end of
each year from Year 4 through Year 7.
Finally, Gulf Shores has a board-designated building fund to pay for
projected facility renovations starting in eight years and lasting for four years
(at t = 8, 9, 10, and 11). Current building renovation costs are estimated to be
$14,500,000 a year, but they are expected to increase at a rate of 3.5 percent
a year. So far, Gulf Shores has accumulated $15,000,000 (at t = 0). Gary’s
long-run financial plan is to add $5,000,000 in each of the next four years
(at t = 1, 2, 3, and 4). Then, he plans to make equal annual contributions in
each of the following three years (t = 5, 6, and 7).
All of the decisions Gary faces involve time value analysis.
EBSCOhost – printed on 5/25/2023 1:09 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
C ase 11 : Gu lf S h o re s S u rg e r y C e n te rs
Nominal
Bank
Sun Trust
BankSouth
Product
Compounding
Interest Rate
Savings account
Weekly
2.0%
Certificate of deposit
Monthly
3.0%
Term loan
Quarterly
4.0%
Savings account
Daily
2.0%
Certificate of deposit
Annually
3.0%
Term loan
Semiannually
4.0%
81
EXHIBIT 11.1
Interest Rates on Three
Financial Products
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