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St. Elsewhere is considering opening an outpatient clinic for patients who have minor injuries or...

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Accounting

St. Elsewhere is considering opening an outpatient clinic for patients who have minor injuries or illnesses. The clinic will be open 24 hours a day, 7 days per week; the hospital expects 20,000 patient visits in the first year. The financial projections for year 1 of operations are below:

Average Revenue per Patient

$200 per patient

Wages and Benefits

$1 million

Average Medical Supplies Used per Patient

$30 per patient

Interest

$300,000

Depreciation

$200,000

Utilities

$30,000 per month

Miscellaneous

$200,000

St. Elsewhere buys $20 million in medical supplies from Knight Rider Industries (KRI). KRI offers St. Elsewhere terms of 3/10, net 50. Currently the hospital is paying KRI on day 10. Assume 365 days in a year.

(A) What is the total trade credit available from KRI?

(B) What is the amount of the costly trade credit?

(C) Should the hospital continue to pay on day 10, or replace its trade credit with a 9 percent bank loan?

1. Yes, keep paying on day 10

2. No, replace with bank loan

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