Question

You are the Chief Executive officer of Mansura Community Hospital, a purely private sector operator. The hospital has a patient base of 6,000 with 50% using the services of the hospital twice each year. Existing records suggest that 35% of patients who use the hospital also need MRI images for their doctors to make appropriate decisions. The MRI of the hospital has for some time now not been in good working condition. The effect of this situation is that you have to send your patient to a private diagnostic center whenever there is a need to have MRI images for your patients. This indeed creates a lot of inconvenience both for your patients and doctors. Your marketing manager in the last meeting put forward a proposal for the hospital to acquire an MRI rather than send patients to a potential competitor for such services. The following is also part of the proposal sent by the marketing manager of the hospital.

1. The MRI will cost the hospital an amount of GHC 600,000 for an outright purchase agreement.
2. The cost of installation and training in the use of the machine will also cost a flat amount of GHC 40,000 and an annual charge of 2% of the cost of the MRI for maintenance.
3. To be able to cater to all its clients, the hospital will need three MRIs with 3 radiologists and 6 technicians to operate the machines.
4. Although the radiologists will work 7 days a week, their schedules are planned in a way such that each radiologist is on off duty for 2 months in a year. In the case of the technicians, they are often on off duty for 3 months in a year
5. The radiologists are paid GHC 1200 a week and 60% of that for the technicians. Note that the radiologist and technicians are not paid when on off duty.

The challenge, however, is that the hospital does not have the money to buy the machine from its resources. They have approached their bankers who are willing to provide funds to cover the procurement, installation, and training of staff. Assume that the average cost of money in the money market is 17% for Ghana Cedi, 3% for the Dollar, 3.5% for Euro, and an additional 3% of the amount borrowed as processing charges.

Alternatively, the Hospital can lease the 2 MRIs from CNCTI Corporation in Dubai. This transaction will cost a flat fee of GHC 90,000, insurance cover equivalent to 15% of the market price of the three MRIs annually and a monthly lease rent of GHC 45,000 to be paid for the use of the MRI

Required:

Assuming that the MRI has a useful life of 7 years and the current charge per patient visit to the MRI unit is GHC 400 but increasing year on year by 10%, advice the management of the hospital whether they should buy the machine or lease it?

Answer 1

When company goes for Buying Machine
EMI every year	469,103
Maintainance Cost	36,000
Radiologists Salary	144,000
Technicians Salary	155,520
TOTAL YEARLY COST	804,623

NOTES -

1.EMI is calculated using PMT foumula in which amount is 600000*3 i.e. 1800000 for three machines plus 40000 of installatation and training. total 1840000.

Intrest rate = 17%

Time = 7 Years

2. Mainiatinance cost = 600000*3*2% = 36000

3.

Radiologists Salary = 1200 per week

4 weeks a month

3 such people are required

and they work for 10 months a year

TOTAL = =(1200*4)*10*3 = 144000

4.

Technicians Salary = 1200*60% = 720 per weel

4 weeks a month

6 such people are required

and they work for 9 months a year

TOTAL = (720*4)*9*6 = 155520

When company goes for Leasing the machine
EMI every year	22,945
Insurance Cover	270,000
Yearly lease rent	540,000
Radiologists Salary	144,000
Technicians Salary	155,520
TOTAL YEARLY COST	1,132,465

1. EMI is calculated using PMT for 90000 flat fee@ 17% for 7 years

2. Insurance cover @ 15% on cost of 3 machines i.e.1800000 = 270000

3. Yearly Lease rent = 45000*12

4. Radiologists Salary and Technicians Salary is same as above

Clearly, the yearly cost of buying the machine is less than that of leasing the machine. So the hospital should buy the machine.