Gulf Shores Surgery Centers

Group Case Analysis Report

Mustafa Mahmood
Maryam Hussain A Aldubaisi

Submitted
To
Dr. Sung W. Choi

Pennsylvania State University Harrisburg Campus

1
 Title Page numbers

Introduction 3

Question one 3-4

Question two 5-6

Question three 6-7

Question four 7-9

Question five 9-10

Question six/References 11

2
 Gulf Shores Surgery Centers

Introduction

1. This case relates to a gentleman named Gary Hudson, who did Masters in Health Services

Administration and started his career in healthcare. After hard work of many years he has been

elevated to the prestigious post of chief operating and financial officer of Gulf Shores Surgery

Centers, which is an investor-owned chain of ambulatory surgery centers.

2. After assuming the new position, Gary is looking forward to select suitable banks to meet his

financial needs i.e. investments and borrowing by comparing their offers. He has various

options to exercise which have been covered in the form of five questions with their solutions

in the succeeding paras.

Question 1

Gary has approached two banks i.e. SunTrust and Bank South to know about their interest

rates on: -

a. Savings accounts,

b. Certificates of deposit (CD)

c. Loans.

He wants to know the banks which are suitable for these financial needs.

3
Ans1

Explanation /Interpretation

In this case two banks, Sun trust and Bank South have provided their products i.e., saving

account, certificate of deposit, and term loan with different compounding and nominal interest

rates. As financial analyst we calculated their effective interest rates for comparison by using

the following formula: -

Effective interest rate= (1+i/n) n-1 where i= interest rate, n= Number of compounding period.

After calculating effective interest rates, we chose Bank South for the saving accounts and Sun

Trust for the certificates of deposits because both give higher value, which mean more money

will be earned. Whereas we chose Bank South for term loan as it gives us opportunity to pay

lower interest rates on loans.

4
Question 2

a. Gary has selected Sun Trust for investment in CD’s.

b. He wants to invest the donations made by a wealthy patient.

c. He wants to know how much his company has accumulated till the last donation was

made. By using CD interest rate offered by the bank in Question 1.

Ans.2

Explanation /Interpretation

In this question, we were asked to choose certificate of deposit to invest donation from the

wealthy patient and requirement was to use our time value of money knowledge and skill to

calculate the total amount accumulated by the day of last donation. As mentioned in answer of

question calculated over excel. Since Sun Trust 3.0416% effective interest is the best choice to

5
invest donation in Certificate of Deposit, we took 3.0416% as compounding rate and calculate

compounding factor by using the formula given below: -

Compounding Factor = (1+r) n

Then multiply each year compounding factor with relevant year’s donation to get future value

which were summed up to $1910688.69.

The assumption was that in all these years in which donations were made, the interest rate will

remain same which is highly unlikely in real life scenarios.

Question 3
a. The Center plans to take a five-year loan i.e. $250000 term to be paid in equal annual
installments.
b. How much the Center will owe to the bank if Gary decides to pay off the loan at the end of
the third year?
c. Term loan rate offered by Bank South is 4.04%.

Ans. 3

6
Explanation /Interpretation

In this question we were asked to calculate how much is to be paid off by the end of year 3 to

get rid of five-year term loan. Bank South was chosen for term loan as it offers lower interest

rates based on our calculation of effective interest rate of 4.04% in question one.

We used financial calculator to calculate annual loan repayment amount which was $56,220

annual payment for five years to pay off the loan. The annual payment includes a portion of

principle repayment and interest payment. We use loan amortization schedule to calculate

what’s due at the end of year 3. To know the exact amount to be repaid by the end of year 3,

which was $ 105974 shown in excel spreadsheet and highlighted as per the loan schedule.

Our basic assumption was interest rate is fixed not variable and Gulf Shores could choose to pay

off all the loan in early repayment option without paying any penalties.

Question 4

a. Center takes out a seven-year term loan to be repaid in annual installments, the first
payment due at the end of Year 1.
b. How much would the fixed annual installment be at the end of each year from Year 4
through Year 7?
c. Term loan interest rate is 4.04%

7
Ans. 4

Explanation /Interpretation

In this question, we were asked to calculate equal loan repayment installments from year four

to year seven if the Center takes out seven year loan and pay $25000, 50000 and 75000 as loan

repayment in first three years. The loan was taken from Bank South on the same rate of 4.04%.

After drawing up loan schedule as shown in excel spread sheet with $25000, 50000 and 75000

of repayment for first three years, we concluded $127460 is still repayable. Using financial

calculator to calculate PMT with zero future value, ‘N’ as three and ‘PV’ as $127460, we got our

answer $35147, which is fixed annual repayment for next four years to settle the loan in full.

After getting $35147 as fixed annual repayment amount, we completed our loan amortization

schedule.

In this question, we assumed that the Bank South is offering same rate for a five year or seven-

year term loan considering that a seven-year loan will be riskier than the five-year loan. Also, it

8
is assumed that the interest rate is fixed rate over the loan period rather than a variable rate. It

is assumed that the bank will be willing to accept the variable repayment method chosen by the

Center for first three years.

Question 5

a. Gary is investing the contributions to the board-designated building fund in CDs.

b. How much will be the equal annual contributions in Years 5, 6, and 7 to ensure that the

Center will have sufficient funds to pay for projected facility renovations?

c. Building Fund is to pay for renovation in the last four years that is 8,9,10 and 11.

d. Renovation cost is $ 14500000, CD interest rate 3.0416 and renovation cost inflation rate

is 3.5%.

Ans.5

9
Explanation /Interpretation

In question 5, Center is considering to make a renovation expenditure in eight years’ time with

an outflow of $14500000. This expenditure is also affected by inflation at a rate of 3.5%. We

were required to adjust the expenditure with inflation and also calculate future values of cash

flow invested today from year one to year four at a compound rate of 3.0416%. We used goal

seek to calculate missing years, which were year 5, 6 and 7 cash flows. A sufficient amount

required to make sure enough contributions are made for the future expenditure.

It was assumed that inflation rate and discount rate remain constant over the time period.

10
Question. 6.

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

Ans.6

Following are the key learning points: -

a. Time value analysis is crucial during financial decision-making.

b. Time lines are essential, and they make it easy to visualize when cash flows occur.

c. Analyzing EAR (effective annual interest) is useful for making basic decisions about where to

place and invest money.

References

Financial Calculator for Question 3 and 4.

Question 3

https://www.calculator.net/finance-calculator.html?
ctype=contributeamount&ctargetamountv=0&cyearsv=3&cstartingprinciplev=155896&cinterest
ratev=4.04&ccontributeamountv=1000&ciadditionat1=end&printit=0&x=73&y=11.

Question 4

https://www.calculator.net/finance-calculator.html?
ctype=contributeamount&ctargetamountv=0&cyearsv=4&cstartingprinciplev=127460&cinterest
ratev=4.04&ccontributeamountv=1000&ciadditionat1=end&printit=0&x=47&y=23

11
12