You are the manager of the surgery department at a hospital which serves mostly Medicare patients. The hospital performs 1,000 surgical operations per year using the traditional method. The Medicare payment for a surgical operation using the traditional method is 2,250 dollars and the cost to the hospital per operation is 1,750 dollars.
a) Compute the total revenue, the total cost, and the profit at the end of each year if the hospital continues to use the traditional method for surgical operations.
b) You have the option to purchase a Robotic Surgery Machine to perform the surgical operations. The machine has a cost of 1,250,000 dollars, but the Medicare payment for a surgical operation using the Robotic Surgery Machine is 2,500 dollars and a surgical operation using a Robotic Surgery Machine has a lower cost per operation of 1,500 dollars.
i) Compute the total revenue, the total cost, and the profit at the end of each year if the hospital performs the surgical operations with the Robotic Surgery Machine.
ii) For simplicity, assume the life of the machine is three years. In addition, assume the opportunity cost of funds (interest rate) is 10% per year. Should the hospital buy the machine?