A new cardiac catheterization lab was constructed at Havea Heart Hospital. The i

Question

A new cardiac catheterization lab was constructed at Havea Heart Hospital. The investment for the lab was $450,000 in equipment costs and $50,000 in renovation costs. A desired return on investment is 12 percent. Once the lab was constructed, 5,000 patients were served in the first year and were charged $340, for each procedure. The annual fixed cost for the catheterization lab is $1 million and the variable cost is $129 per procedure. What is the catheterization labs profit? Did this profit meet its desired ROI? Why or Why not?

Explanation / Answer

Soln :

Total investment = investment for the lab + renovation costs

Total investment = $ 500,000

Revenue in 1 year = $5000X340 = $ 1,700,000

Annual fixed cost = 1,000,000

variable cost = 129X5000 = 645,000

total cost = 1,000,000 +  645,000 = 1,645,000

profit =  $ 1,700,000 - 1,645,000 = $ 55,000

ROI = gain - cost / cost

ROI = 55,000 - $ 500,000 / $ 500,000 = - 89%

The profit did not meet because the ROI is negative .

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