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Gulf Shores Surgery Centers, An Investor-Owned Chain of Ambulatory Surgery Centers With Six Locations in Florida's Panhandle

Here are three key learning points from this case: 1. Different compounding periods for interest rates require using the effective annual rate (EAR) to properly compare options and select the best choice. 2. Creating a timeline to lay out cash flows over multiple years is essential for solving problems involving investments or loans paid out or accumulated over time. 3. The time value of money principles demonstrate how even small differences in interest rates can result in substantial differences in ending balances or payment amounts over long time horizons for investments, loans, or other financial decisions. Properly accounting for interest compounding is critical.

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129 views3 pages

Gulf Shores Surgery Centers, An Investor-Owned Chain of Ambulatory Surgery Centers With Six Locations in Florida's Panhandle

Here are three key learning points from this case: 1. Different compounding periods for interest rates require using the effective annual rate (EAR) to properly compare options and select the best choice. 2. Creating a timeline to lay out cash flows over multiple years is essential for solving problems involving investments or loans paid out or accumulated over time. 3. The time value of money principles demonstrate how even small differences in interest rates can result in substantial differences in ending balances or payment amounts over long time horizons for investments, loans, or other financial decisions. Properly accounting for interest compounding is critical.

Uploaded by

Aalia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CASE 1 GULF SHORES SURGERY CENTERS (#12)

Overview
Gulf Shores Surgery Centers, an investor-owned chain of ambulatory
surgery centers with six locations in Florida’s Panhandle.

1. Which bank should Gary choose for a saving account, which bank for a certificate of deposit,
and which bank for a term loan?

Based on the calculated EAR for the various choices from the 2 banks, Gary should choose
Bank South for the savings account, Sun Trust bank for the CD, and Bank South again for
the term loan.

Sun Trust Bank      


  Interest Rate Compounded EAR
Savings Account 0.04 daily 4.08%
CD 0.06 monthly 6.17%
Term Loan 0.08 quarterly 8.24%

Bank South      
  Interest Rate Compounded EAR
Savings Account 0.041 weekly 4.18%
CD 0.061 annually 6.10%
Term Loan 0.0806 semi annually 8.22%

2. Gary will invest the donations from a wealthy investor in CDs. How much will the Center
have accumulated on the day of the last donation? (Use the CD interest rate offered by the
bank you selected for a CD in question 1.)

The center will have accumulated $2,088,997.30 at the time of the last donation.

3. If the Center takes out a 5-year term loan that would be repaid in equal annual installments,
how much will it owe to BankSouth if Gary decides to pay off the loan early, at the end of
the third year? (Use the term loan interest rate offered by the bank you selected for a term
loan in question 1.)

$112,413.93 will be owed at the end of the 3rd year. Based on the 5 yr term loan with equal
installment payments of $5095.46
4. If the Center takes out a 7-year term loan that would be repaid in different annual
installments (with the first payment due at the end of year one), how much would the fixed
annual installment be at the end of each year from Year 4 through Year 7? (Use the term loan
interest rate offered by the bank you selected for a term loan in question 1.)

Using Bank South Term Loan rate = 8.22%

Loan Amount Present Value = PV = $250,000 for 7 years

Year 1

Repayment Amount = $25,000


Interest = $250,000 * .0822 = $20,550
Principal Payment = Repayment Amount - Interest = $25,000 - $20,550 = $4,450

Year 2

Repayment Amount = $50,000


Interest = ($250,000 - $4,450) * 0.0822 = $20,184.21
Principal Payment = Repayment Amount - Interest = $50,000 - $20,184.21 = $29,815.79

Year 3

Repayment Amount = $75,000


Interest = ($250,000 - $4,450 - $29,815.79) * 0.0822 = $17,733.35
Principal Payment = Repayment Amount - Interest = $75,000 - $17,733.35 = $57,266.65
Closing Loan Balance at end of Year 3
($250,000 - $4,450 - $29,815.79 - $57,266.65) = $158,467.56
The remaining 4 years = Nper.
Fixed Annual Loan Repayment Amount = PMT(0.0822,4,-$158,467.56) = $48,079.16
Fixed Annual Instalments for Year 4 thru 7 = $48,079.16

Loan Amortization Schedule

Beginning Repayment Remaining


Amount Payment Interest of Principal Balance
Year (1) (2) (3) (4) (5)

1 $250,000 $25,000 $20,550 $4,450 $245,550

2 $245,550 $50,000 $20,184 $29,816 $215,734


3 $215,734 $75,000 $17,733 $57,267 $158,468

4 $158,468 $ 48,079 $13,026 $35,053 $123,414


5 $48,079 $37,934 $85,480
$123,414 $10,145

6 $85,480 $48,079 $7,026 $41,053 $44,427

7 $44,427 $48,079 $3,652 $44,427 $0

5. Gary will invest the contributions to the board-designated building fund in CDs. How much
will the equal annual contributions in years 5, 6, and 7 have to be to ensure the Center will
have sufficient funds to pay for projected facility renovations? (Use the CD interest rate
offered by the bank you selected for a CD in question 1.) (Hint: Use a time line to lay out the
year 0-4 and 8-11 annual cash flows and then use Goal Seek in Excel to solve for the year 5-
7 cash flows.)

Year Annual Cash Flows


0 15,000,000
1 5,000,000
2 5,000,000
3 5,000,000
4 5,000,000
5 6,342,642
6 6,342,642
7 6,342,642
8 ($19,093,731.04)
9 ($19,762,011.62)
10 ($20,453,682.03)
11 ($21,169,560.90)

NPV $0.00

Goal 19027925.99
Seek

6. In your opinion, what are three key learning points from this case?

1. Different compounding periods requires use of the EAR


2. Time lines are essential
3. The time value of money can be substantial

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