Health Matters Private Hospital is a small, 75 bed private hospital located south of Brisbane. The hospital management team is considering three possible alternative uses for some of its currently ‘underutilized’ space.
The space could be left as a passive relaxation area, furnished with casual furniture, a wide-screen television, computer, board games and library books for use by patients and visitors. The estimated set up costs would be $15,000.
Annual maintenance, replacement and cleaning costs are anticipated to be quite minimal and should be approximately $1,000 per year.
The space could be subleased to a small coffee shop with a budgeted annual lease receipt of $30,000 each year for the next five years. An initial outlay of $35,000 would be required to fit out the area. Only hot and cold beverages and cakes and snack items would be available. No other cooking facilities or food preparation areas would be provided. All profits (or losses) of the coffee shop would return to the independent operator. The only income for the hospital would be the annual lease receipt and no other annual expenses are anticipated to be incurred directly by Health Matters.
- The area could be fitted out for an additional 2 private patient rooms. This option would incur an initial cost of $60,000. Such an upgrade would potentially increase revenue from patient stays. Based on expected occupancy rates the anticipated additional revenue is expected to be:
Year 1 - $30, 000 Year 2 - $30, 000 Year 3 - $35, 000 Year 4 - $35, 000 Year 5 - $40, 000
Prepare a formal business report to the hospital management team, outlining an analysis of each of the alternatives, and then making a clear recommendation as to your preferred use for the space.
Include in your analysis, consideration of both financial and non-financial factors for each alternative. You may make any assumptions and include any other information you feel relevant.
Assume a rate of return of 8% for any net present value calculations. Your detailed financial calculations should be included in appendices to the report.