You are reviewing financial data for your organization from last quarter and feel that a new line of serve or product would add to your revenue streams. After careful review, you have several options which would add value to patient care areas but know that there must also be a financial profit in your analysis.
To conduct the basic return on investment you will need to first calculate the investment revenue (IR) using the following formula:
IR = Estimated patients x cost of services
Once you have calculated that you can proceed to calculate the estimated return on investment (ROI) using the following formula:
ROI = Investment Revenue (IR) – Investment Cost
Investment Cost
Scenario #1
EKG Machine Equipment Cost $10,000
Facility: Hearts Cardiology
Patients: 10,000 patients annually: estimated 80% are eligible for EKG
Charge: $20
Scenario #2
Fat Freezing: Equipment Cost $40,000
Facility: Concierge Adult Medicine
Patients: 10,000 patients annually: estimated 25% will complete 2 treatments
Charge: $1200 per treatment
Instructions
- Present your IR & ROI calculations for each of the 2 scenarios (show all work)
- Discuss the calculated ROI for each service
- Include in your discussion why you feel the service may or may not bea viable financial option.
Expert Solution Preview
Introduction: The following is an analysis of two potential new service offerings for an organization, using return on investment (ROI) calculations to determine their financial viability.
Scenario #1:
EKG Machine Equipment Cost: $10,000
Facility: Hearts Cardiology
Patients: 10,000 patients annually, estimated 80% are eligible for EKG
Charge: $20 per EKG
Investment Revenue (IR) = 10,000 patients x $20 = $200,000
Investment Cost = $10,000
ROI = $200,000 – $10,000 / $10,000 = 19
Discussion: The calculated ROI for the EKG machine is 19. This indicates that the investment would generate $19 for every $1 spent. This is a relatively high ROI and suggests the EKG machine would be a financially viable option. Additionally, the service would add value to patient care areas.
Scenario #2:
Fat Freezing: Equipment Cost $40,000
Facility: Concierge Adult Medicine
Patients: 10,000 patients annually, estimated 25% will complete 2 treatments
Charge: $1,200 per treatment
Investment Revenue (IR) = 10,000 patients x 25% x 2 treatments x $1,200 = $600,000
Investment Cost = $40,000
ROI = $600,000 – $40,000 / $40,000 = 14
Discussion: The calculated ROI for fat freezing is 14. This is a lower ROI than the EKG machine, but still suggests a financial viability. However, it is important to note that this service targets a smaller patient population, and may require more extensive marketing to generate an enough investment revenue. Additionally, the high cost of the equipment raises the investment cost, making the required ROI higher for the investment to be profitable.
Conclusion: Both scenarios show potential financial value, but scenario 1 (EKG machine) has a higher ROI, indicating a more financially viable option. However, it is important to note that the financial analysis is only one aspect of decision-making. Other factors such as patient needs and competition should also be considered before making final decisions on new services.
