Finance Final Exam

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FinanceFinal Exam

FinanceFinal Exam

Question1

Memorandum

TO:THECEO AND FINANCE COMMITTEE OF THE BOARD OF DIRECTORS OF LAKESHOREREGIONAL MEDICAL CENTER

FROM:STUDENT NAME

SUBJECT:PLANNING AND BUDGETING PROCESS REVIEW

Thepurpose of this memo is to review some options to the current budgetcreation process of the organization and provide the CEO and Board ofDirectors with recommendations on the most efficient for them.

Azero-based budget would be better for Lakeshore Regional MedicalCenter given that they want to review the entire budgeting process.Conventional budgeting uses previous period`s estimates as a base tocreate the new budget. This will carry forward the redundancies ofthe past budgeting and planning process into their new budgetsirrespective of the changes. Zero-based budgets start with all zeroelements and justifications must be made by managers on any figuresto be included in the budget.

Isupport a bottom-up approach to budgeting where the lower levelmanagers and other employees, get an opportunity to participate inthe creation process. Aside from the benefits of a feeling of owningthe budget, lower level managers are expected to make more realisticestimates given that they are at the core of the operations. Top downbudgets are not participatory in nature and lock out low-levelmanagers and employees from the creation process.

Flexiblebudgets are better for any organization in today’s dynamic businessenvironments, to accommodate any material changes in the level ofactivity during the budget period. Fixed budgets are based onassumptions and are static in nature, unlike flexible budgets whichare realistic and dynamic to changes in output.

Varianceanalysis after a budget period assists the managers and otherstakeholders to compare the actual performance against the expectedlevel. Additional research is done to determine what caused thedifferences between the two performance measures. This will informthe corrective measures to be taken to ensure that future performancedoes not fluctuate away from the budget.

Businessplanning is the process of coming up with objectives and goals of thebusiness, performance standards and timelines to implement theorganization’s strategy. A budget, on the other hand, is used toactualize the business plan by identifying, prioritizing, acquiringand allocating resources towards that end.

Iwill be glad to discuss these recommendations with the team duringyour next meeting and ensure the best alternative is selected.

Question2:

Memorandum

TO:JEFFBROWN, CFO

FROM: BILLRIGHT, RADIOLOGY DIRECTOR

SUBJECT:CAPITALBUDGET

Thisis a return memo on the earlier capital budget treatment for the newCAT scanner

Anew CAT scanner to replace the old one will come at a cost to theorganization which warrants justification using financial analysis.To retire a machine from the balance sheet, its actual cost,accumulated depreciation and useful life will determine whether itsreplacement is beneficial to the organization or not. Retiring anasset normally leads to its sale and the proceeds there-from will becompared to its Net Book Value to determine whether there was aprofit or loss on disposal. Profit on disposal is treated as taxableincome to the company in that year. The new asset – CAT scanner isalso expected to increase the level of activity and subsequently theamount of income. This is expected to increase the cash flow of theinstitution from operational activities. Cash flow from financingactivities is expected to reduced considering the investment into theasset – the cost of the CAT scanner = $695,000. The present valueof the future income that the new CAT scanner is expected to generateto the institution will be used to calculate the number of years theasset is expected to pay its full cost back. This period forms thebreak-even point for the asset

Iwill be glad to discuss these recommendations with you during ournext meeting.

Question4:

Capitalbudgeting should incorporate both the break even and profitabilitymeasures. The break even analysis will show how fast the asset willpay back its investment. However, this may be a factor of its lowcost and not its higher level of activity (Gapenski,2015).A new asset is expected to increase income to the institution fromthe higher level of productivity, which forms the profitabilityaspect of capital budgeting. The two elements corroborate one anotherto support a capital budgeting decision. A new asset is also expectedto result in better quality output in the form of products andservices. Since the quality may not always translate toprofitability, it is necessary to incorporate it in capitalbudgeting.

Question5:

Day`scash on hand is a ratio that estimates the number of days that theavailable cash at the healthcare facility can cater for, regardingdaily expenditure. This is a liquidity ratio that normally findsapplication in non-profit taking healthcare facilities aimed atensuring they control their expenditures for sustainability(Gapenski,2015).Days in Accounts receivable on the other hand is a performance ratiothat estimates the average number of days that a debtor takes to payup. This ratio creates an opinion on how the company manages itsassets. The ratios inform the management how many days the stock ofcash and its equivalents can last them and how many days its takesfor the company to collect its debt respectively.

Question6

Thebasic equation for calculating the present value of a lump sum isgiven as:

PV= FV * (1 + r/m) -mt

Where,

PV= the present value,

FV= is the future value of the lump sum,

r= is the annual interest rate or discounting rate

m= 12 = months in a year

t= the number of years between now and when the lump sum is received.

Thisformula is used to calculate the present monetary value of atransaction that results in future income (Gapenski,2015).The calculation accommodates the changes expected in the economyduring the duration, t, including the value of the currencyfluctuating and inflation. These changes are represented by the rate– r which when applied to the future lump sum, the result is itsestimated present value.

References

Gapenski,L. C. (2015). UnderstandingHealthcare Financial Management.(7th Ed.). Chicago, IL: Health Administration Press.