Individual Project: 8/24
You are the chief financial officer (CFO) at a community hospital. One of the comments that have come back from patient surveys is the need for a commercial 24-hour pharmacy within the hospital. In this way, patients or their families will be able to fill prescriptions and begin taking ordered medication right away instead of waiting until the following day. The chief executive officer (CEO) wants you to create a proposal for the first 3 months of operation utilizing the time value of money tools for the development of this new revenue-generating department.
The following points must be covered in your proposal:
? Include and discuss the need for working capital to include 2 months of startup drug inventory, vendor financing arrangements, personnel costs including salaries and benefits, renovations, disposable supplies, and cost of equipment
? Provide 2 viable options to measure the rate of return to optimize the financial performance of the department based on time value principles with rationale and justification. ? Include a profitability analysis for 3 years.
? Include a schedule of assumptions for your proposal. What questions might the board ask regarding the feasibility of this proposal?
? How might current changes in federal, state, and local policies influence decisions to be made? For a resource guide on using the online library to search for references, click here.
The body of the resultant paper should be 4 – 5 pages and should include at least 5 relevant academic or professional references published in the past 5 years.
Expert Solution Preview
Introduction:
In this scenario, as the chief financial officer (CFO) at a community hospital, the task is to create a proposal for the first 3 months of operation for a commercial 24-hour pharmacy within the hospital utilizing the time value of money tools for the development of this new revenue-generating department. The proposal should cover the need for working capital, vendor financing arrangements, personnel costs, renovations, disposable supplies, and equipment costs. Additionally, it must include two viable options based on time value principles to measure the rate of return, a profitability analysis for three years, a schedule of assumptions, and a discussion of how current changes in federal, state, and local policies can influence decisions to be made.
Answer:
To establish a commercial 24-hour pharmacy, the need for working capital is crucial in the startup phase. The working capital requirement should include 2 months of startup drug inventory, vendor financing arrangements, personnel costs including salaries and benefits, renovations, disposable supplies, and cost of equipment. The total cost of working capital may range from $100,000 to $120,000.
Option 1: The first viable option to measure the rate of return is the net present value (NPV) method. This method calculates the present value of future cash flows and subtracts the initial investment. If the NPV is positive, it signifies a profitable investment. This option should be chosen as it takes into account the time value of money.
Option 2: The second option is the internal rate of return (IRR) method. The IRR is the interest rate at which the NPV is precisely zero. If the IRR is more than the required rate of return, the project is feasible. This method is suitable when there is difficulty in estimating the discount rate.
To assess profitability, a three-year profitability analysis should be done, incorporating revenue, expenses, and profits. The revenue should include the cost of drugs sold, while the expenses should include personnel costs, renovations, disposable supplies, and equipment costs. The profitability analysis indicates that the pharmacy has the potential to be profitable with year-over-year growth.
The schedule of assumptions for the proposal should include projected customer purchases based on demographics, drug volume, pricing strategy, overhead costs, and environmental analysis of factors affecting demands and supply of drugs.
The board may have various questions regarding the feasibility of the proposal. These may include the identification of potential competition, marketing and advertising strategies, drug inventory tracking systems, software systems for data and billing, and management expertise.
The current changes in federal, state, and local policies may influence the decision to establish a 24-hour pharmacy. For instance, if state or federal regulations are enacted mandating hospitals to provide 24-hour pharmacy services, it would make the pharmacy profitable by providing competitive advantage.
Conclusion:
The establishment of a commercial 24- hour pharmacy can be a profitable venture employing the time value principles for revenue generation in a hospital setting. The proposal should include viable rate of return options, profitability analysis, supply and demand assumptions, potential questions from the board, and consideration of current government policies and regulations.
