Capital budgeting and financial analysis

1 Discuss one Ratio that is used to evaluate capital budget performance (Refer to Section of Evaluating Capital Budgeting Performance from Nowicki’s Chapter 13)

2 Discuss two operating indicators for healthcare organizations (Refer to Section of Operating Indicators from Nowicki’s Chapter 14 or Section of Operating Indicator Analysis from Capenski’s Chapter 17)

3 Assume that you are the chief financial officer at UMUC Hospital. The CEO has asked you to analyze a proposed capital investment—Project X. This project requires a net investment outlay of $10,000, and the cost of capital is 12%. The project’s expected net cash flows are:

Year 0: -$10,000

Year 1:  $6,500

Year 2:  $3,000

Year 3:  $3,000

Year 4:  $1,000

a) Calculate the present value of each year’s cash inflow.

b) Calculate this project’s “discounted” payback period. (Refer to Problem 13.3 in the Section of Steps in the Capital Budgeting Process from Nowocki’s Chapter 13. Hint: “Discounted” payback period is the calculation of payback period using present value of each year.)

c) Calculate the net present value (NPV).

d) Calculate the internal rate of return (IRR). (Using Excel : if you have -10000 in Cell A3, 6500 in Cell A4, 3000 in Cell A5, 3000 in Cell A6, 1000 in Cell A7, then in a blank cell type: +IRR(A3:A7) and you will get the answer. Note that by default this function is set to guess the IRR= 10% from the beginning.)

e) Do you think this project financially acceptable? Explain your answer based on the above calculated results.

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