Case Scenario:
The board of directors of a hospital is working on a five-year strategic plan for the facility. One of the strategic goals is to build a new $1 million cancer research wing in five years. The group is concerned that current economic conditions might reduce revenues over the next five years and they are uncertain about the fate of the construction project. You are part of team tasked with conducting a capital budgeting analysis.
The hospital reported 1.5 million in revenue in 2010 and 1.3 million in 2011. The hospital's equity is $2 million. The hospital estimates delayed third-party payments in 2011 of $500 thousand. The hospital expects to receive $250 thousand in grants in 2011.
The hospital has current liabilities include operating costs of $1 million in 2010 and $1.2 million in 2011. In addition, the hospital retired $150 thousand in debt though it still holds $750 thousand in debt. The hospital funded the employee pension plan with matching funds of $150 thousand in both 2010 and 2011. Malpractice costs were $150 thousand. Depreciation expenses of $100 thousand in 2010 and $105 thousand in 2011. The hospital is a nonprofit facility so firm incurs no tax liabilities.
Tasks:
The final SLP is devoted to capital budgeting for Trinity's project. The cost to build the facility is $1 million. The cost of capital is 15%. The facility is expected to generate $250 thousand in the second year and $500 in the third year. Revenue projections thereafter are a 25% increase each year.
Based on the information make your final recommendations to Include the following:
Q1. Discuss the overall financial condition of the firm and the likelihood the hospital has sufficient cash flow over the next five years to pursue the project.
Q2. Calculate and interpret the payback and discounted payback periods in addition to the NPV, IRR, MIRR, and PI for the project.