Assume that entire receivables balance has to be financed

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Fargo Memorial Hospital has annual patient service revenues of $14,400,000. It has two major third-party payers, and some of its patients are self-payers. The hospital's patient accounts manager estimates that 10% of the hospital's billings are paid (received by the hospital) on Day 30, 60% are paid on Day 60, and 30% are paid on Day 90. (5% of total billings end up as bad debt losses, but that figure is not relevant to this problem.)

Suppose the hospital's annual cost of carrying receivables is 10%. If the electronic claims system costs $30,000 a year to lease and operate, should it be adopted? (Assume that the entire receivables balance has to be financed.)

Reference no: EM13811292

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