HSMP 587 - Health Care Fin. Mngmt 1/9/17

HSMP 587 - Health Care Fin. Mngmt 1/9/17

Winter 2017Dr. Neal Wallace

Problem Set # 1

Do these in EXCEL using it to perform and show your calculations. E-mail your EXCEL file to me by class on the 12th. Name you file PS1-lastname-587.

1) List and provide a brief explanation of the three concepts that underlie sound and ethical financial management.

2) You have started a business that has 5 staff each costing $5,000/month and each generating $5,000 in revenue/month. Salaries are paid on the 1st of each month with one month lag (e.g. salary is paid for work done in the prior month). Revenue for services rendered in one month is not collected until the second following month (two month lag).

a) In your first year how much salary will you owe your 5 employees? How much revenue will you be owed for services you render? What is the difference between revenue and expenses as counted here (e.g. revenue-expenses)?

b) In your first year, how much salary will you pay out during the year? How much revenue will you collect during the year? What is the difference between revenue and expenses as counted here?

c) Which one of a) and b) above represent cash or accrual accounting, and why (briefly)? If the stream of revenues and expenses continues unchanged through a second year of business, would there be a difference between cash and accrual accounting (in terms of revenue-expenses) for the second year? What if the business closed during the third year, would there be a difference in cash/accrual accounting for that year’s revenue-expenses? What does this say about when these two accounting approaches provide “different” perspectives?

3) Using the flow of revenue and expenses from 1) above, if you could earn 2% a month for any investments (or had to pay 2% a month to borrow money), what is the present value as of the beginning of the year of:

(Note: For simplicity, just assume that you would earn (or pay) a full months interest for any amount paid/received in a month)

a) The revenue you earned in the year as paid on a cash basis (i.e. through 14 months)?

b) The expensesyou owed for the year paid on a cash basis (i.e. through 13 months)?

c) What is the difference between the present values of revenues and expenses you have calculated?

d) What does the answer to c) above tell you about theopportunity cost of running this business with revenue lagging a month more than expense?

4) Suppose you need to buy a piece of equipment at the end of three years costing $100,000:

a) What equal amounts of money do you need to invest at the beginning of each year to have enough to buy the equipment if you can invest money at a 5% annual interest rate?

b) If the equipment costs $90,000 right now, what is the average annual inflation rate that accounts for the price increase over three years (Hint: inflation rate = interest rate)?

5) Define depreciation as an accounting term. What is straight line depreciation and how does it work? Is depreciation a tangible or intangible expense?