should Cavalier Skilled Nursing Homes invest in this project? Explain your answer

Question 1

Suppose
you are asked to do a cash flow budget for the next 12 months for a newly
opened baby health clinic. The budget must be done on a month-by-month basis.
As the clinic has just opened you have no historical accounting data. The
clinic is allowed to treat both private (fee paying) and public (no fee
charged) patients. Outline the steps you would take, the type of questions you
would need to ask and any assumptions you would need to make to develop the
budget. Highlight the main areas of concern you would have about the accuracy
of your forecasts – in particular, would you be more confident about your
revenue or expense forecasts?

Question 2

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Cavalier Skilled Nursing Homes is considering
setting up a new medical facility. Management estimates that it will cost $1.5
million to purchase the necessary equipment and renovate the building to
support its long term care services. The projected net cash flows generated by
the new facility over the next five years are given below:

Year 1 -0-

Year 2 $380,000

Year 3 $400,000

Year 4 $420,000

Year 5 $440,000

Assuming
a five year life and an 8{0e601fc7fe3603dc36f9ca2f49ef4cd268b5950ef1bbcf1f795cc00e94cdd119} cost of capital, compute the net present value of
this proposal. On the merits of your
net present value computation, should Cavalier Skilled Nursing Homes invest in
this project? Explain your answer.

Question 3

Painless Dentists (Painless) expected
to treat 6,000 patients during 2011. The practice expected each patient to need
an average of 3 X-rays at a cost to Painless of $11 per X-ray. Painless charges
Patients $20 for each X-ray. The actual activity reports for 2011 showed that
5,500 patients came to the clinic and received an average of 3.25 X-rays with
an average per X-ray cost of $10.50. For this question there is no need to do an
adjusted budget, simply do the difference between the actual and budgeted
figures.

a.
What is Painless’ revenue variance? Is the total revenue
variance favourable or unfavourable? Why?

b.
What is Painless’ expense
variance? Is the total expense variance favourable or unfavourable? Why?

c.
Was the net impact of the two
variances helpful or harmful to the economic health of the organisation? Why?

 

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