You are a member of the financial services department at Benson Regional Medical Center. The chief financial officer and chair of the capital budgeting committee, Dana Foster, has requested that you perform some capital analysis of two proposed patient service programs.
You have been provided with a spreadsheet that covers much of the projected financials for each of the proposed programs. Your task is to perform an analysis of that information and provide your recommendation to the capital budgeting committee as to which program they should pursue.
You have been asked to create a presentation to present your findings to the capital budgeting committee.
Using the provided spreadsheet, complete a capital budgeting analysis on the information provided in the spreadsheet. Specifically, you will need to identify a net present value (NPV), internal rate of return (IRR), and a discounted payback period for proposed Program #1 and Program #2. You will present your finding in a presentation.
Design a PowerPoint presentation for the capital budgeting committee that includes all of the following:
Create a brief 1-2 slide description of the proposed programs.
Develop a comparison between the cash flow projects of each program from Year 0 to Year 5. Highlight the differences.
Compare the results and interpretation of the discounted payback period between both programs.
Compare the net present value (NPV) for each program.
Compare the Internal rate of return (IRR) for each program.
Develop a recommendation for which program the capital budgeting committee should take into consideration. Include supporting rationale.
Full Answer Section
1. Data Preparation:
- Identify Relevant Cash Flows:
- Initial investment costs (e.g., equipment purchases, renovations)
- Annual operating costs and revenues
- Salvage value of assets at the end of the project's life
- Tax implications
2. Calculate NPV:
- Discount Rate: Determine an appropriate discount rate, often the company's weighted average cost of capital (WACC).
- Discount Cash Flows: Discount each year's cash flow to its present value using the discount rate.
- Sum the Present Values: Add up the present values of all cash flows, including the initial investment.
- Interpret NPV:
- Positive NPV: The project is expected to generate value.
- Negative NPV: The project is expected to destroy value.
3. Calculate IRR:
- Find the Discount Rate: Determine the discount rate that makes the NPV of the project equal to zero.
- Interpret IRR:
- IRR > Discount Rate: The project is financially viable.
- IRR < Discount Rate: The project is not financially viable.
4. Calculate Discounted Payback Period:
- Discount Future Cash Flows: Discount each future cash flow to its present value.
- Cumulative Present Value: Calculate the cumulative present value of cash flows over time.
- Determine Payback Period: Identify the point at which the cumulative present value becomes positive.
PowerPoint Presentation Outline
Slide 1: Title Slide
- Title: Capital Budgeting Analysis: Proposed Programs 1 and 2
- Your Name
- Date
Slide 2: Introduction
- Briefly describe the purpose of the analysis.
- Outline the key financial metrics to be used.
Slide 3: Program 1 Overview
- Brief description of the program
- Key features and benefits
- Initial investment and ongoing costs
Slide 4: Program 2 Overview
- Brief description of the program
- Key features and benefits
- Initial investment and ongoing costs
Slide 5: Cash Flow Comparison
- Table comparing the cash flows of both programs, year by year.
- Highlight significant differences in cash inflows and outflows.
Slide 6: Discounted Payback Period
- Define discounted payback period.
- Compare the discounted payback periods of both programs.
- Interpret the results.
Slide 7: Net Present Value (NPV)
- Define NPV.
- Compare the NPV of both programs.
- Interpret the results.
Slide 8: Internal Rate of Return (IRR)
- Define IRR.
- Compare the IRR of both programs.
- Interpret the results.
Slide 9: Recommendation
- Based on the analysis, recommend the program that offers the highest financial return and aligns with the organization's strategic goals.
- Provide supporting rationale for the recommendation.
Slide 10: Conclusion
- Summarize the key findings of the analysis.
- Reiterate the recommended course of action.
Additional Considerations:
- Sensitivity Analysis: Test the impact of changes in key assumptions on the financial results.
- Risk Assessment: Identify potential risks and uncertainties associated with each project.
- Strategic Alignment: Ensure that the chosen project aligns with the organization's overall strategic goals.
By following these steps and considering the specific details of the two programs, the capital budgeting committee can make an informed decision about which project to pursue.
Sample Answer
Understanding the Task
We are tasked with analyzing two proposed patient service programs at Benson Regional Medical Center and recommending the most financially viable option to the capital budgeting committee. To do this, we will employ a combination of capital budgeting techniques, primarily Net Present Value (NPV) and Internal Rate of Return (IRR).
Data Analysis and Interpretation
Note: To provide a specific analysis, we would need the actual spreadsheet data. However, I can outline the steps and considerations for such an analysis.