Financial Analysis of Rehab Center Versus Neonatal Wing

Abstract 

The case study involves a situation where an organization is faced with the decision of choosing between mutually exclusive projects that involve building a rehab or building a neonatal wing. In order to choose the right project a financial analysis should be done based on Net Present Value (NPV), Profitability Index (PI), Return on Investment (ROI), and Payer (or case) mix. The methods to be used have different merits and demerits and can be used to provide an analysis of different aspects of the project. From the analysis, the results from the NPV should have the heaviest weight in making the decision to realize the right outcome. 

Financial Analysis of Rehab Center Versus Neonatal Wing 

There are several metrics that can be used to highlight the strengths, weakness, and risks of a given investment or project. The metrics are mostly used when comparing several project alternatives. The different metrics that can be used include the Net Present Value (NPV), Profitability Index (PI), Return on Investment (ROI), and Payer (or case) mix. For the given case study, two mutually exclusive projects that involve building a Rehab Center and Neonatal Wing are to be analyzed by considering how the different metrics can be used to perform an assessment of the project. The concepts of NPV, ROI, PI, and Payer (or case) mix are explained and their use in measuring the validity of the two mutually exclusive projects analyzed. 

Net Present Value 

The Net Present Value (NPV) will involve measuring of the two mutually exclusive projects in terms of today’s dollars. The method makes use of information based on expected future free cash flows and investment outlay. The amounts have to be expressed on the present value in order to determine the net value of an investment. The forecasted future cash flows are computed and their present values by analyzing the expected life and discount rate of the investment proposals are analyzed (DeFusco et al., 2015). When using the NPV for the two investment options, the criterion for the selection would be to accept the investment that has an NPV of greater than 0 and rejecting the project if the NPV is less than 0. For the two mutually exclusive projects, the analysis should be done on each of the projects and the one with the higher NPV chosen. 

Return on Investment 

The return on invest is a metric that is used to analyze the ratio of the net operating income after tax for a given period and dividing it by the invested capital of the company at the end of the period. The ROI makes use of information about the capital investment and the net operating income after tax to make the calculations (Chandra, 2017). For the two types of investment, their given ROIs will be taken into consideration and compared in order to make the right decision. The computed ROIs will be compared based on the cut off rate or on the cost of capital so that the management can have the basis of making the right decision. 

Profitability Index 

The profitability index is a ratio that shows the present value of future cash flow to that of the initial investment. It is used to represent the NPV through an index format and not a dollar amount. The profitability index is easy to use as it is easy to interpret. A project that has a profitability index of over 1 should be accepted while a project that has a profitability index of less than 1 should be rejected (DeFusco et al., 2015). The assessment of the rehab center and neonatal wing could be analyzed by finding the ratio of the future cash flow to that of the initial investment. The project with the higher profitability index should be set for selection. However, the PI is similar to the NPV but is in a simplified format. 

Payer Mix (product mix or case mix) 

Payer mix is used to analyze the percentage of revenue that would come from a mix of players such as government insurance, self-paying individuals, and private insurance. The revenues that come from each of the given payers should be analyzed (Manary, 2015). For the analysis, the analyst should determine the project that should involve payers that generate the highest revenues. Marketing strategies to attract the payers and resources allocated for the mix of payers should also be analyzed for the two projects to determine the best decision. While the Payer mix provides a suitable analysis of various modes of payment it does not provide an accurate assessment of the outcome. 

Conclusion 

The given metrics provide different aspects of measurement that should be put in consideration when choosing the project of building a Rehab Center or a Neonatal Wing. The Net Present Value would have the heaviest weight in making the decisions. The profitability index would result in values similar to that of the NPV and may be used as an alternative in understanding the ratios. The ROI would also be used to provide a financial analysis of the expected financial outcome of the project based on the amount invested. The payer mix would also be used to analyze the project based on the different types of payers and resources to reach those payers. The presented findings will be presented to the board and management who will be advised accordingly. 

References 

Chandra, P. (2017).  Investment analysis and portfolio management . McGraw-Hill Education. 

DeFusco, R. A., McLeavey, D. W., Pinto, J. E., Runkle, D. E., & Anson, M. J. (2015).  Quantitative investment analysis . John Wiley & Sons. 

Manary, M., Staelin, R., Boulding, W., & Glickman, S. W. (2015). Payer mix & financial health drive hospital quality: Implications for value-based reimbursement policies.  Behavioral Science & Policy ,  1 (1), 77-84.