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Hell’s Pass Hospital (HPH) has the highest surgical mortality rate of
any hospital in the Colorado area. As a result the hospital’s
reputation and surgical volume has fallen in recent years. Hospital
administrators attribute this excess mortality to the community’s
frequency of unusually severe trauma requiring risky surgery.
Consequently, the surgical department head, Dr. Gall, has requested that
the hospital invest in a robotic surgery system.
As of 2009, approximately 1,400 US hospitals had acquired robotic
surgery technology. These systems facilitate complicated surgeries and
hold the potential to improve quality and reduce length of stay (note
that in reality, the clinical evidence on robotic surgery units is far
from conclusive). Dr. Gall has selected the RUR-1000, manufactured by
Rossum’s Universal Robots.
The RUR-1000 has a purchase price of $2,500,000 including
installation and delivery charges. This machine falls into the MACRS
5-year class with current allowances of 0.20, 0.32, 0.19, 0.12, 0.11,
and 0.06 in years 1-6 respectively. Rossum’s manufacturer warranty and
maintenance policy costs $100,000 per year payable at the beginning of
each year.
While the equipment has a six-year expected useful life, the hospital
would only use the asset for four years. The anticipated scrap value at
the end of four years is $315,000 assuming HPH owned the equipment.
This purchase could be financed by a four-year simple interest conventional bank note that would carry a 10% interest charge (i.e., a normal looking loan with a 10% cost of capital).
Alternatively, the equipment could be leased for $815,000 per year
from Hejny Rentals, with each payment payable at the beginning of the
year and the first payment due on delivery (i.e., time=0).
Hejny has a good reputation (they were recommended by Dr. McCullough who
rented a pig roaster from them) and they would purchase the RUR-1000
under the same terms as HPH (e.g., $2,500,000 price and
$100,000 maintenance contract). However, Hejny can borrow at 9%, has a
40% tax rate, and they would have a $375,000 scrap value at the end of
four years.
If the RUR-1000 is acquired, HPH expected to receive an additional
100 patients per year (the total quantity remains 100 during all four
years of operation). On average, per procedure prices and costs will be
$15,000 and $7,000 during the first year. The hospital expects that per
procedure prices and costs (but not quantities) will grow by 5% per
year. To make things easier, assume that per procedure revenues and
costs occur at the end of each year (i.e., not at time 0 but at times 1, 2, 3, and 4).
Questions
Specific questions should be answered in a single excel document and
explained with one or two sentences each. Please format the exam and
your answers professionally – this doesn’t have to be fancy, but your
analysis has to be organized and readable.
- Is the robotic surgery investment financially acceptable (i.e., profitable) if the equipment is purchased?
- Is the investment financially acceptable if the equipment is leased at the stated lease price?
- Could you negotiate a lower lease price with the lessor and would this change your decision to lease vs. buy?
- Based on 1, 2, and 3, should the project go forward and should HPH lease or buy?
