Reference no: EM132508477

Point 1: As you are aware, Medical Associates has achieved its targeted utilization and financial projections for ambulatory surgery in Jasper. It is now time to consider a similar service at our offices in Middleboro. The physical facilities needed for ambulatory surgery will cost $450,000. Our cost of capital is 4 percent and the hurdle rate is 6 percent. The anticipated salvage value of these new fixed assets will be $150,000 after five years. To accomplish this we will need to recruit two new general surgeons for our Jasper office, thereby freeing our Middleboro general surgeons to work in this new ambulatory surgical facility. We anticipate opening no earlier than January 2, 2016

Point 2: Based on operational estimates, we anticipate that this project's annual operational revenue will exceed its operational expenses (R-E) for each of the first five years in accordance with the following schedule. Note that the operational expenses include all direct costs including salaries and benefits.

Fiscal Implications of New Ambulatory Surgery Service

R-E ($) Median Cases per Day (M-F)

Year 01           20,000              9.0

Year 02          40,000             10.0

Year 03          60,000             12.5

Year 04           100,000           12.5

Year 05          140,000                14.0

Question 1: We estimate that this unit, employing the standard RVU system used in hospitals, will generate 1.1 surgical procedures per case. Assess the financial implication. Should we do this? Why?