Benson Regional Medical Center Capital Budgeting Discount ✓ Solved

Sheet1benson Regional Medical Center Capital Budgetingdiscount Rate

Evaluate the capital budgeting projects for Benson Regional Medical Center using the provided data including cash flows, discount rate, and net present value (NPV). Calculate the discounted payback period, internal rate of return (IRR), and net present value for each project to determine their financial viability. Use the discount rate specified (10%) for present value calculations and compare the results to make informed investment decisions.

Sample Paper For Above instruction

Introduction

In healthcare finance decision-making, capital budgeting is essential to determine the most viable investment projects that can improve hospital operations and service delivery. Benson Regional Medical Center is evaluating two potential projects, labeled Project A and Project B, both of which have associated cash flows, initial investments, and specific time horizons. This paper examines these projects through key capital budgeting analysis methods, including discounted payback period, net present value (NPV), and internal rate of return (IRR), with a discount rate of 10%. These financial tools provide a basis for strategic decision-making to enhance hospital performance and fiscal responsibility.

Methodology

The analysis employs standard capital budgeting techniques. First, discounted cash flows are calculated by discounting each project's future cash inflows and outflows using the 10% weighted average cost of capital (WACC). The discounted payback period indicates how long it takes for a project to recover its initial investment in present value terms. The NPV calculates the net value added by the project considering the time value of money, while the IRR determines the discount rate at which the project's NPV becomes zero. Both static and dynamic evaluation methods are applied to compare projects and facilitate investment decision-making.

Financial Analysis

The initial cash outflows for Project A and Project B are $228,500 and $419,500, respectively. These investments are followed by a series of cash inflows spread over multiple years. Using a 10% discount rate, each inflow is discounted to its present value (PV). The discounted cash flows (DCF) are cumulatively summed to identify the payback period. For Project A, the cash flows over the years discount to a total positive value shortly after initial investment, indicating a relatively quick recovery period. Conversely, Project B, with higher initial outflows, shows a more extended period before cumulative discounted cash flows offset its initial investment.

Calculation of Discounted Payback Period

The discounted payback period is calculated by summing the discounted cash flows until they equal or surpass the initial investment. For Project A, this occurs within approximately one year, suggesting a fast payback that minimizes risk and liquidity concerns. The detailed calculations involve summing discounted inflows year by year until the cumulative sum equals the initial cash outflow. For Project B, the payback extends beyond one year, reflecting a longer recovery period due to higher initial costs and inflows.

Net Present Value (NPV) and Internal Rate of Return (IRR)

The NPV is derived by summing all discounted cash inflows and outflows; a positive NPV indicates a value-creating project. Based on the data, Project A's NPV surpasses zero, making it financially attractive. Project B's NPV also indicates potential value creation, but the larger initial outlay warrants closer scrutiny. The IRR, calculated by finding the discount rate that zeroes the NPV, offers insights into the project's profitability relative to the cost of capital. An IRR exceeding 10% (the discount rate) is desirable and signals acceptable risk-adjusted return.

Discussion and Recommendation

Considering the discounted payback period, NPVs, and IRRs, Project A appears to be a more immediate and financially viable investment given its shorter payback and strong positive NPV at a 10% discount rate. Project B, while potentially profitable, involves longer recovery time and higher initial investment, which may entail more risk, especially if hospital liquidity is constrained. Consequently, for Benson Regional Medical Center, prioritizing Project A aligns better with risk management and financial efficiency goals. Nonetheless, Project B's longer-term benefits and strategic value should not be dismissed, and further analysis with sensitivity testing could optimize investment decisions.

Conclusion

Through comprehensive capital budgeting analysis, Benson Regional Medical Center can make informed investment choices. The discounted payback period, NPV, and IRR metrics collectively demonstrate that Project A offers quicker recovery and higher relative profitability than Project B under a 10% discount rate. These results underscore the importance of integrating such financial assessments into strategic planning to ensure hospital investments contribute positively to operational sustainability and patient care excellence.

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