Basic Net Present Value Analysis, Competing Projects Kildare Medical Center, a for-profit hospital, has three investment opportunities: (1) adding a wing for in-patient treatment of substance abuse, (2) adding a pathology laboratory, and (3) expanding the outpatient surgery wing. The initial investments and the net present value for the three alternatives are as follows:
Substance Abuse Laboratory Outpatient Surgery
Investment $1,500,000 $500,000 $1,000,000
NPV 150,000 140,000 135,000
Although the hospital would like to invest in all three alternatives, only $1.5 million is available.
Required:
1. Rank the projects on the basis of NPV, and allocate the funds in order of this ranking. If a blank requires an entry of zero, enter "0". Enter your answers in whole dollars and not in millions of dollars.
Ranking Project Allocation
Substance abuse wing $
Laboratory $
Outpatient surgery wing $
What project or projects were selected?
Substance abuse wing only
Laboratory only
Substance abuse wing and laboratory
Laboratory and outpatient surgery wing
Outpatient surgery wing only
What is the total NPV realized by the medical center using this approach? $
2. CONCEPTUAL CONNECTION: Assume that the size of the lot on which the hospital is located makes the substance abuse wing and the outpatient surgery wing mutually exclusive. With unlimited capital, which of those two projects would be chosen?
The laboratory and the outpatient surgery wing
The substance abuse wing and the laboratory
The substance abuse wing and the outpatient surgery wing
With limited capital and the three projects being considered, which projects would be chosen?
The laboratory and the outpatient surgery wing
The substance abuse wing and the outpatient surgery wing
The substance abuse wing and the laboratory
3. CONCEPTUAL CONNECTION: Form a group with two to four other students, and discuss qualitative considerations that should be considered in capital budgeting evaluations. Identify three such considerations.
Quicker response to market changes and flexibility in production capacity.
Strategic fit and long-term competitive improvement from the project.
Risks inherent in the project, business, or country for the investment.
All of the above.
None of these.