Assumptions Two hospitals report their annual projected revenue for five years t
ID: 2617182 • Letter: A
Question
Assumptions
Two hospitals report their annual projected revenue for five years to the local newspaper for a story on the area’s future economic outlook. However, Hospital One has applied a cumulative inflation factor of five percent per year while Hospital Two has not applied any inflation factor. Thus the information is not properly comparable.
Projected Revenue
Year 1
Year 2
Year 3
Year 4
Year 5
Hospital 1
$20,000,000
$22,500,000
$27,500,000
$27,500,000
$30,000,000
Hospital 2
$20,000,000
$21,000,000
$25,000,000
$24,000,000
$26,000,000
Required
Revise Hospital 2’s projections by applying a cumulative inflation factor of five percent per year.
Projected Revenue
Year 1
Year 2
Year 3
Year 4
Year 5
Hospital 1
$20,000,000
$22,500,000
$27,500,000
$27,500,000
$30,000,000
Hospital 2
$20,000,000
$21,000,000
$25,000,000
$24,000,000
$26,000,000
Explanation / Answer
Year = n
1
2
3
4
5
Hospital 2 = base of Year 1*(1+r)^n r= 5%
2000000
2100000
2205000
2315250
2431013
Year = n
1
2
3
4
5
Hospital 2 = base of Year 1*(1+r)^n r= 5%
2000000
2100000
2205000
2315250
2431013
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