Healthcare finance / Capital Budgeting

Health care finance
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The financial condition of the hospital depends on its ability to meet immediate and long term financial obligations. In essence, the cash in flows ought to be greater than the cash flows for an entity to be considered as being in a sound financial condition. However, the cost of capital is relevant in calculating the cash flows, as the net present value of a project needs to be discounted. Positive cash flows indicate that a project is worth pursuing, unlike those with negative cash flows. The undiscounted cash flows for the five years amount to $1,156,250. However, there is a need to use discounted figures using the present value interest factor (PVIF) to make a final decision.
The NPV represents the difference between the present values of cash inflows and the present value of cash outflows. Through discounting, it is possible to estimate the profitability of a project, given its projected future cash flows and cost of capital. The NPV further compares the value of the project in dollar terms versus the future value in dollars. A positive NPV indicates that the project is profitable unlike that with a negative NPV, unless there are restrictions through capital rationing (Baker & English, 2011). With an NPV of 263, 588, the future cash flows are positive and project should be accepted. The choice of a positive NPV project increases the value of an organization (Baker & Powell, 2005).
cost of facilitycash flowsPVIFdiscounted cash flowsnow-1,000,000-1,000,0001-1,000,000year 100.8696year 2250,0000.7561$189,025 year 35000000.6575$328,750.00 year 46250000.5718$357,375.00 year 57812500.4972388437.5total1,156,250263,588The IRR is the rate at which the NPV is equal to zero, in other words the NPV of inflows and outflows are equal. The IRR is 22.5% and since it is higher than the cost of capital the project should be undertaken.
The payback period relates to the time it takes to recover the initial investment, the initial investment is 1, 000,000 so the regular payback period is 3.4 years and the discounted payback period is 4.32 years. The discounted payback period is similar to the regular payback period method but utilizes the discounted cash flows. The discounted payback period occurs when negative cash flows change into positive, the project need be accepted as the time of recouping initial investment is less than the prescribed time.
The modified internal rate of return takes into account both the cost of investment and interest through the cash invested. The MIRR is a better capital budgeting technique as it takes into account the cost of reinvestment (Moles et al., 2011). In this case the MIRR is almost equal to the IRR, the profitability index (PI) indicates the payoff of a project; it is the ration between the present value of future cash flows and the initial investment. The PI is 1.26 and since it is greater t...