# Case Study: Beverly Enterprises Owns A Nursing Home

*Register to read the introduction…*Significant new investments should be made only if the return based on replacement cost is greater than the firm’s cost of capital. So, what cash flow, when divided $100,000, gives 6%.

A. $4,800

B. $6,000

C. $6,600

D. $8,000

6. Beverly Enterprises owns a nursing home that is currently earning $2.0 million in cash flow on an annual basis, but this amount is expected to drop in the future. The nursing home has a book value of $20 million, a replacement cost of $40 million, and a current sale value of $10 million. If Beverly Enterprises has a cost of capital equal to 15 percent, at what value of annual cash flow would Beverly Enterprises be likely to sell the nursing home?

A. $1,500,000

B. $2,000,000

C. $4,000,000

Numeric Problems (4 @ 6 = 24)

For the following four problems, start with the price-setting example from the text. The initial assumptions are provided in the table below.

Total cost $100,000

Total volume 1,000

Average cost $100 Payer volumes

Medicare (payment rate = $95) 400

Medicaid (payment rate = $75) 100

Managed Care # 1 (payment rate = $110) 300

Managed Care # 2 (pay 80% of charges) 100

Uninsured (pay 10% of charges)

*…show more content…*

Start with the original assumptions. The hospital is facing pressure from public-interest groups to control the prices it charges to the uninsured. Assume that the hospital is able through various efficiencies to cut its per-visit cost by 5%. It also negotiates a 7% increase with managed-care plan #1. Assuming all other factors are unchanged, what is the new required price?

9. Start with the original assumptions. Notice that managed care plan #1 receives a much lower price in return for sending a larger volume of patients. Managed care plan #2 (MC#2) wants to pay a lower cost per case and is willing to send 250 more patients (350 total from MC#2) to the clinic in return for a rate of $110 per case. Assume that the average cost per case drops to $90 due to the economies of scale. All other assumptions are unchanged. What is the new required price?

10. Start with the assumptions in problem 9. But now assume that the additional volume does not enable enough economies-of-scale to reduce the average cost per case as much as originally anticipated. Assume now that the average cost per case drops only to $95. What is the new required