Twin Falls Community Hospital: Capital Investment Analysis

 1. 

Variable	0	1	2	3	4	5
Land opportunity cost	$ 500,000.00
Building/equipment cost	$ 10,000,000.00
Net revenues		$ 5,000,000.00	$ 5,150,000.00	$ 5,304,500.00	$ 5,463,635.00	$ 5,627,544.05
(-) labor costs		$ 800,000.00	$ 824,000.00	$ 848,720.00	$ 874,181.60	$ 900,407.05
(-) utilities cost		$ 50,000.00	$ 51,500.00	$ 53,045.00	$ 54,636.35	$ 56,275.44
(-) supplies		$ 2,000,000.00	$ 2,060,000.00	$ 2,121,800.00	$ 2,185,454.00	$ 2,251,017.62
(-) incremental overhead		$ 36,000.00	$ 37,080.00	$ 38,192.40	$ 39,338.17	$ 40,518.32
Net income		$ 2,114,000.00	$ 2,177,420.00	$ 2,242,742.60	$ 2,310,024.88	$ 2,379,325.62
(+) Net land salvage value
(+) Net building / equipment salvage value
Net Cash flow	$ 10,500,000.00	$ 2,114,000.00	$ 2,177,420.00	$ 2,242,742.60	$ 2,310,024.88	$ 2,379,325.62

2. 

YEAR	ANNUAL CASH FLOW	NET CASH FLOW
0	$ (10,500,000.00)	$ (10,500,000.00)
1	$ 2,114,000.00	$ (8,386,000.00)
2	$ 2,177,420.00	$ (6,208,580.00)
3	$ 2,242,742.60	$ (3,965,837.40)
4	$ 2,310,024.88	$ (1,655,812.52)
5	$ 2,379,325.62	$ 723,513.10

PAYBACK = 

4 + (1,655,812.52/2,379,325.62) 

= 4.695916736 

The project payback is in approximately 4.7 years. 

PRESENT VALUE FACTOR	PV*ANNUAL INFLOW
0.909	$ 1,921,626.00
0.454	$ 988,548.68
0.101	$ 226,517.00
0.014	$ 32,340.35
0.001	$ 2,379.33
	$ 3,171,411.36

B. PV factors 

Year 1 = 1/ (1+0.10) 1 

Year 2 = 2/ (2+0.10) 2 

Year 3 = 3/ (3+0.10) 3 

Year 4 = 4/ (4+0.10) 4 

Year 5 = 5/ (5+0.10) 5 

NET PRESENT VALUE = TOTAL PRESENT VALUE OF CASH INFLOW – INITIAL INVESTMENTS 

= 3,171,411.36 – 10,500,000 

= -7, 328,588.64 

C. 

The NPV is < 0. The IRR IS less than the assumed discounted rate of 10%. The NPV will therefore be used as it discounts future cash flows. 

3. The existing overhead costs should be included because they reflect core costs that are incurred by the organization regardless of their investments. For instance, applying existing overhead costs that are fixed for the entire facility will reflect an increased output. The existing overhead costs should however be apportioned to the outpatient surgery center. 

4. The effect of cannibalization is likely to occur if the inpatient surgery unit was being used to conduct outpatient surgeries. However, as per the data, there is a relatively constant inpatient surgery uptake over the years. The minimal cannibalization that may occur can then be reported as an investment by the surgery unit in general to expand potential outpatient market. If the physicians were to open their own outpatient surgery facility, the cannibalization may occur due to the lack of specialists to offer the desired services at the community hospital. 

5. In calculating both scenarios the cost of capital is 10%. The first case (best case) scenario will assume that the value of the land rose to 7 million USD while the second assumes fell to 3 million. 

Best = 3,171,411.36 – 8,500,000 

= -5,328,588.64 

Worst = 3,171,411.36 – 12,500,000 

= -9,328,588.64 

Average NPV = -7,328,588 

PRESENT VALUE FACTOR	PV*ANNUAL INFLOW
0.971	$ 2,052,694.00
0.485	$ 1,056,048.70
0.108	$ 242,216.20
0.0151	$ 34,881.38
0.0016	$ 3,806.92

6 . PV factors 

Year n = n/ (n+0.03) 1 

NPV = TOTAL PRESENT VALUE OF CASH INFLOW – INITIAL INVESTMENTS 

= 3,389,647.20 – 10,500,000 

= -7, 110, 352.8 

7. My final recommendations about the outpatient surgery center is that it is not good for the investors. The Net present Values are still less than 0 in both the best case and risk adjusted scenario. In addition to this, the probability of a second outpatient unit being open by the specialists may impact the investment negatively. To assess the viability part of the already existing inpatient theatres can be converted to outpatient units to serve the increased demand. 

References 

Zweifel, P., Praktiknjo, A., & Erdmann, G. (2017). Investment and Profitability Calculation. In  Energy Economics  (pp. 37-63). Springer, Berlin, Heidelberg. 

Henisz, W. J. (2016). The Costs and Benefits of Calculating the Net Present Value of Corporate Diplomacy.  Field Actions Science Reports. The journal of field actions , (Special Issue 14). 

Gallo, A. (2016). A refresher on internal rate of return.  Harvard Business Review Digital Articles ,  2 . 

Gallagher, T., Miao, H., & Ryan, P. A. (2017). Implied risk adjusted discount rates and certainty equivalence in capital budgeting.  Global Journal of Accounting and Finance Volume ,  1 (2).