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.