Capital Investment AnalysisNameInstitutionInstructorCourseDate Capital Investment AnalysisTwin Falls Community Hospital is a 250-bed non-profit hospital in the city of Twin Falls and one of the leading healthcare providers in the region. The management of the hospital is evaluating a proposed ambulatory surgery center. The outpatient surgery market has significantly grown since the first surgery center in 1970.
This has been attributed to the advancements in technology, approval of minimally invasive surgery techniques by Medicare, and the increase in preference by patients due to the convenience and affordability of outpatient surgeries. This increase has led to a stiff competition in the outpatient surgical facilities. However, there are no outpatient surgery centers in Twin Falls, which will be an advantage to Twin Falls Community Hospital new healthcare facility. The management conducted a capital investment analysis.Conduct A Scenario Analysis.
What Is Its Expected NPV? What Are The Worst And Best-case NPVs? How Does The Worst-Case Value Help In Assessing The Hospital’s Ability To Bear The Risk Of This Investment?A scenario analysis helps managers in determining the potential range of outcomes from a proposed project. 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5Land opportunity cost ($500,000) Building/equipment cost (10,000,000) Net revenues $5,000,000 $5,150,000 $5,304,500 $5,463,635 $5,627,544.05Less: Labor costs 800,000 824,000 848,720 874,181.
60 900,407.05Utilities costs 50,000 51,500 53,045 54,636.35 56,275.44Supplies 2,000,000 2,060,000 2,121,800 2,185,454 2,251,017.62Incremental overhead 36,000 37,080 38,192 39,337.76 40,517.
89Net income $2,114,000 $2,177,420 $2,242,743 $2,310,025.29 $2,379,326.05Plus; Net building/equipment salvage value Net cash flow ($10,500,000) $2,114,000 $2,177,420 $2,242,743 $2,310,025.29 $2,379,326.05Expected Net present value of the project = the difference between the present value of cash inflows and the present value of cash outflows over a period. Formula NPV = C x {(1 – (1 + R)-T) / R} ? Initial InvestmentYear 1 = $2,114,000/1+0.
1=1,921,818.18Year 2 = $2,177,420/ (1+0.1) ^2=1,799,520.66Year 3 = $2,242,743/ (1+0.1) ^3=1,685,006.01Year 4 = $2,310,025.29/ (1+0.
1) ^4=1,577,778.16Year 5 = $2,379,326.05/ (1+0.1) ^5=1,477,374.28Total = 1,921,818.18+1,799,520.66+1,685,006.
01+1,577,778.16+1,477,374.28 = 8,461,497.29Net present value = 15,500,000 – 8,461,497.29 = 7,038,502.71The worst-case scenario NPV 250 days in a yearSalvage price = $3,000,000 at a 15% rate Average net income = $3,750,000 per dayNPV= 6,260,869.56The worst-case value can help in assessing the hospital’s ability to bear the risk of this investment as this helps managers in comparing the worst-case scenario with the capital investment, which can be able to provide the financial status of the whole project. Information provided will encourage the hospital management in investing in the project since they are aware of the worst-case scenario that can happen and the effect on the capital investment of the project.
The best case scenario NPV250 days in a yearSalvage price = $5,000,000 at a 70% rate Average net income = $6,250,000 per dayNPV= 12,434,782.61Now Assume That The Project Is Judged To Have High Risk. Furthermore, the Hospital’s Standard Procedure Is To Use A 3% Point Risk Adjustment. What Is the Project’s NPV After Adjusting For The Assessment Of High-Risk?The Project’s NPV after adjusting for the assessment of high-riskNPV (3% risk) = 7,038,502.71 * 3/1007,038,502.71 x 0.03 = 211,155.08NPV = 211,155.08
