DaVinci Case Study

As you progress and move on to your next stop at a major university or college, you will be expected to read case studies, perform some research and answer questions related to your case studies. Many classes will have 3-5 of these cases in addition to exams and other major projects. In order to give you a preview of things to come, attached is a case study to help you not only prepare for future classes, but to help illustrate real life examples of the items that you have been learning about. This case not only takes information that you learned in this class, but crosses over to other accounting classes as well. In addition, your answers may incorporate items from other business classes as well.

You are responsible for organizing your answers in a manner that makes it efficient for me to read and understand. In situations where numeric answers are required, it is up to you how much or how little to show me in terms of calculations. If you show me too little and you get the answer wrong, you will receive less credit. On the other hand, if you show me a bunch of messy calculations on the back of a napkin, you are not likely to get partial credit either if your answer is wrong. Bottom line, you are going to need to determine the audience (me) and how to present that information in an organized and readable format. If it is a question that does not have a numeric answer but asks you to make a qualitative assertion, you need to answer in paragraphs (more than one is optional) with complete sentences, correct grammar and spelling. This is not an exercise in texting. Again, you need to take whatever time and space is necessary to answer the question. I will warn you that no answer can be reduced to one sentence and that more than 3 pages per question will NOT be read.

Case Study: Surgical Robot Arms Race

1. What is the annual rate of interest being charged to the hospital? The total interest paid over the entire term of the lease?

2. Given this rate of interest, give some reasons on why or why not the hospital should accept this lease contract. Is this a good deal for the lessee?

3. Assume that the hospital has a current borrowing rate of 3.75% is this a capital lease or operating lease? Please explain each of the criteria and your conclusion based on ASC 840. Assume a 7 year life to the equipment, that there is no transfer of ownership to the lessee at the end of the lease term, and that there is no bargain purchase option.

4. Why would a hospital care whether it was a capital lease or an operating lease? When would one be an advantage over the other?

5. Given the new situation, how does that affect questions 1-4? Would your answers be different and why?

6. If the contract were signed, what would be the first journal entry entered by the hospital. What would be the final journal entry? Are they the same or are they different? Why? What underlying principal would explain why they would be the same...? What underlying principal would explain why they would be different?

7. Calculate the contribution margin. Be sure to identify the variable versus the fixed expenses.

8. Based on the determination you made in the above question, discuss the break-even point in number of cases per month. What are the implications associated with this number?

9. Determine the monthly payment for the new lease for the da Vinci robot.

10. Assuming that other existing variable and fixed costs carryover for the next 4 years and that this is an operating lease, what is the net present value of the da Vinci robot assuming a 12% discount rate and the ability to sell the robot for $500,000 at the end of the lease?

11. What is the new break-even point?

12. Is this a profitable venture for the hospital? If profitable, is it profitable enough? Why or why not? If it is not profitable, should the da Vinci robot be discontinued? Why or why not?

13. So, what do you do? This question should be answered an in essay format with a clear beginning, middle and end. You should use transitions between paragraphs and be readable to a knowledgeable business person. This means you will need to discuss the IMA Code of Ethics and how it applies to this situation. This question should not exceed 5 pages double spaced. With that said, a one page answer will not suffice either.