HSAD 330
Financial Management
in Health Care
Q & A w/ Rationales
2024
,1. A hospital is planning to purchase a new MRI machine
that costs $2 million. The expected useful life of the
machine is 10 years and the annual maintenance cost is
$100,000. The hospital uses a discount rate of 8% for
capital budgeting decisions. What is the net present value
(NPV) of the investment?
a) $1,080,000
b) $1,200,000
c) $1,320,000
d) $1,440,000*
Rationale: The NPV is the difference between the present
value of the cash inflows and the cash outflows of the
investment. The cash inflows are the annual savings from
using the new machine, which are assumed to be $300,000
per year for 10 years. The cash outflows are the initial cost
of the machine and the annual maintenance cost. The
present value of the cash inflows is calculated by using the
annuity formula: PV = C * (1 - 1/(1 + r)^n) / r, where C is
the annual cash flow, r is the discount rate, and n is the
number of periods. The present value of the cash outflows
is calculated by adding the initial cost and the present value
of the maintenance cost, which is also an annuity.
Therefore, NPV = 300,000 * (1 - 1/(1 + 0.08)^10) / 0.08 -
2,000,000 - 100,000 * (1 - 1/(1 + 0.08)^10) / 0.08 =
$1,440,000.
2. A nursing home has a total revenue of $10 million and a
total expense of $9 million. The nursing home has 100 beds
and an average occupancy rate of 90%. What is the profit
, margin and the operating cost per patient day of the nursing
home?
a) 10% and $247
b) 10% and $274*
c) 11% and $247
d) 11% and $274
Rationale: The profit margin is the ratio of net income to
total revenue, expressed as a percentage. Net income is the
difference between total revenue and total expense.
Therefore, profit margin = (10,000,000 - 9,000,000) /
10,000,000 = 0.10 or 10%. The operating cost per patient
day is the ratio of total expense to total patient days, where
patient days are calculated by multiplying the number of
beds by the occupancy rate and by the number of days in a
year. Therefore, operating cost per patient day = 9,000,000
/ (100 * 0.9 * 365) = $274.
3. A health insurance company has a premium income of
$50 million and a medical loss ratio of 80%. The company
spends $5 million on administrative costs and pays $2
million in taxes. What is the net income and the return on
revenue of the company?
a) $3 million and 6%
b) $4 million and 8%
c) $5 million and 10%*
d) $6 million and 12%
Rationale: The net income is the difference between
premium income and all expenses, including medical costs,
administrative costs, and taxes. The medical loss ratio is
the ratio of medical costs to premium income, expressed as
Financial Management
in Health Care
Q & A w/ Rationales
2024
,1. A hospital is planning to purchase a new MRI machine
that costs $2 million. The expected useful life of the
machine is 10 years and the annual maintenance cost is
$100,000. The hospital uses a discount rate of 8% for
capital budgeting decisions. What is the net present value
(NPV) of the investment?
a) $1,080,000
b) $1,200,000
c) $1,320,000
d) $1,440,000*
Rationale: The NPV is the difference between the present
value of the cash inflows and the cash outflows of the
investment. The cash inflows are the annual savings from
using the new machine, which are assumed to be $300,000
per year for 10 years. The cash outflows are the initial cost
of the machine and the annual maintenance cost. The
present value of the cash inflows is calculated by using the
annuity formula: PV = C * (1 - 1/(1 + r)^n) / r, where C is
the annual cash flow, r is the discount rate, and n is the
number of periods. The present value of the cash outflows
is calculated by adding the initial cost and the present value
of the maintenance cost, which is also an annuity.
Therefore, NPV = 300,000 * (1 - 1/(1 + 0.08)^10) / 0.08 -
2,000,000 - 100,000 * (1 - 1/(1 + 0.08)^10) / 0.08 =
$1,440,000.
2. A nursing home has a total revenue of $10 million and a
total expense of $9 million. The nursing home has 100 beds
and an average occupancy rate of 90%. What is the profit
, margin and the operating cost per patient day of the nursing
home?
a) 10% and $247
b) 10% and $274*
c) 11% and $247
d) 11% and $274
Rationale: The profit margin is the ratio of net income to
total revenue, expressed as a percentage. Net income is the
difference between total revenue and total expense.
Therefore, profit margin = (10,000,000 - 9,000,000) /
10,000,000 = 0.10 or 10%. The operating cost per patient
day is the ratio of total expense to total patient days, where
patient days are calculated by multiplying the number of
beds by the occupancy rate and by the number of days in a
year. Therefore, operating cost per patient day = 9,000,000
/ (100 * 0.9 * 365) = $274.
3. A health insurance company has a premium income of
$50 million and a medical loss ratio of 80%. The company
spends $5 million on administrative costs and pays $2
million in taxes. What is the net income and the return on
revenue of the company?
a) $3 million and 6%
b) $4 million and 8%
c) $5 million and 10%*
d) $6 million and 12%
Rationale: The net income is the difference between
premium income and all expenses, including medical costs,
administrative costs, and taxes. The medical loss ratio is
the ratio of medical costs to premium income, expressed as
