Essentials Of Cost Accounting For Health Care Organizations 3rd Edition by Steven Finkler, David Ward,Judith Baker

تمرين 1

City Hospital last year appointed Max Smith as Director of Nonhospital Investments. In his first year, Smith did an excellent job of investing hospital endowment funds. He opened a physician referral service, bought an ambulance company, and arranged several joint ventures in the ambulatory area. These initiatives were all quite profitable.
In total, the hospital put up $15 million of its own money and borrowed $15 million of additional money for the investments. The preinterest income from all the ventures was $6 million. The interest rate was 10 percent, and the loan was outstanding for one full year.
City Hospital is now faced with specifying the basis for Smith's evaluation for the next year. They want to be sure to give him incentives to continue his good performance. Smith has no control over whether money invested comes from existing hospital funds or is borrowed by the hospital from a bank.
a) Calculate the ROI.
b) Calculate the ROA.
c) Calculate the RI, assuming the hospital demands a 15 percent return on all assets invested, before consideration of interest cost.
d) Suppose that next year projects will be available that will earn a profit of $2.7 million on an investment of $15 million. Which of the above methods will be the most appropriate for next year's evaluation of Max Smith? The hospital would like to undertake projects with a 15 percent or better preinterest return.
Ignore the effect of income taxes in this problem. Solve this problem using either a calculator or a spreadsheet computer program.