Select Page

Calculations Include: Net Present Value (NPV), Profitability Index (PI)

The goal of the financial analysis stands as identifying the solvency in either of the projects (Schroeder, Clark, & Cathey, 2009). It identifies whether the hospital can maintain a positive cash flow for the hospital as well as financial stability during the development of the chosen project. Given that the hospital has scarce resources, the development of the projects depends on the project that can maintain the hospitals stability and positive cash flow. The financial analysis will provide an overview concerning the projects of building a rehab center and neonatal wing to differentiate which project should get developed as requested. Some of the important concepts identified in the report get recorded.

Net Present Value (NPV), provides a total value of the future totals attained in less cost terms currently. It states that a project providing a positive NPV ought to get accepted. The NPV = present value – cost of investment. The present value = future value/ (1+ interest rate) number of time periods. Therefore, the viability of the two projects gets identified through attaining the present value and the NPV. The Return on Investment (ROI), states the attained net earnings ratio to the investment value. ROI = gross earnings – investment cost / \$3, 000. The project with the highest ROI gets chosen (Kieso, Weygandt, & Warfied, 2007).

The Profitability Index (PI) outlines the cash flows attained in a particular investment. It states that a project with a high profitability index ought to get accepted, a project with a PI of less than one gets rejected while those at break-even point get considered. The break-even point gets identified when a firm does not make a profit or loss in regard to the investment. The payer mix value gets used in identifying the manner in which the allocation of resources in regard to the diagnosis of a related group of patients gets identified (Ehrhardt & Brigham, 2008).

The Rehab Center Project Analysis

Net Present Value = Present Value – Cost of Investment

NPV = PV- COI

Assuming that the initial cost of investment equals \$3, 000 while the project in the first year stands estimated to generate a cash flow of \$1, 500; the second year generates a \$1, 600 and 3rd year \$1, 700. The business will operate at a discount rate of seven percent.

PV = future value / (1+ interest rate) number of time periods

PV = \$ 1, 500 / (1 + 0.07)1 + \$ 1, 600 / (1 + 0.07)2 + \$ 1, 700 / (1 + 0.07)3

PV = \$1, 500 / (1.07)1 + \$1, 600 / (1.07)2 + \$1, 700 / (1.07)3

= \$1, 500 / 1.07 + \$1, 600 / 1.1449 + \$1, 700 / 1.225

=\$1, 402 + \$1, 398 + \$1, 389

PV = \$4, 189

NPV = PV – COI

NPV = \$4, 189 – \$3, 000

NPV = \$1, 189

Return on Investment (ROI)

ROI = Gross earnings – Investment Cost / investment cost

ROI = \$4, 189 – \$3, 000/ \$3, 000

= \$1, 189 / \$3, 000

ROI =0.4%

Profitability Index = \$4, 189 / \$3, 000

PI = 1.4

Neonatal Wing Project Analysis

Net Present Value = Present Value – initial Investment cost

NPV = PV- COI

The estimated initial investment cost stands at \$4, 000. The project in the first year stands estimated to generate a cash flow of \$1, 300; the second year generates a \$1, 200 and \$1, 400. The business will operate at a discount rate of 5 percent.

PV = future value / (1+ interest rate) number of time periods

PV = \$ 1, 300 / (1 + 0.05)2 + \$ 1, 200 / (1 + 0.05)2 + \$ 1, 400 / (1 + 0.05)3

PV = \$1, 300 / (1.05)1 + \$1, 200 / (1.05)2 + \$1, 400 / (1.05)3

= \$1, 300 / 1.05 + \$1, 300 / + 1.1025 + \$1, 400 / 1.1577

= \$1, 238 + \$1, 179 + \$1, 123

PV = \$3, 540

NPV = PV – COI

NPV = \$3, 540 – \$4, 000

NPV = – \$460

Return on Investment (ROI)

ROI = Gross earnings – Investment Cost / investment cost

ROI = \$3, 540 – \$4, 000 / \$4, 000

= – \$460 / \$4, 000

ROI = – 0.12%

Profitability Index = \$3, 540 / \$3, 000

PI = 0.9

The above analysis provides the cash flows to the respective development projects. The development of the Rehab Center provides a positive Net Present Value of \$1, 189 after the three years of development. The Return on Investment stands as 0.4 percent and the Profitability Index stands at 1.4. The figures depict that the rehab project stands viable for construction as it will provide positive returns. The Neonatal wing development project on the other hand provides a Net Present Value of – \$460, and a ROI of -0.12 percent and a Profitability index of 0.9. The analysis displays that the Neonatal wing development cannot get established as it provides a profitability rate below one. A project with a profitability index that occurs below one gets rejected. It states that the profitability index of the Rehab Center which stands above 1 gets accepted for development. Therefore, the financial analysis assists the organization in determining the best decision concerning the project to get financed (Will, Subramanyam, & Robert, 2001). More importantly, the payer mix gets allocated to the rehab center patients equally.

References

Ehrhardt, M., & Brigham, E. (2008). Corporate Finance: A Focused Approach. U.S: Cengage Learning.

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate Accounting. New York: John Wiley and Sons.

Schroeder, R. G., Clark, M., & Cathey, J. (2009). Financial accounting theory and analysis: text and cases. New York: John Wiley and Sons.

Will, I., Subramanyam, K. R., & Robert, F. H. (2001). Financial statement analysis. . New York: McGraw-Hill International.