Describe a healthcare organization’s investment project scenario of your own cho
ID: 2754340 • Letter: D
Question
Describe a healthcare organization’s investment project scenario of your own choosing, provide all relevant data, calculate and complete an NPV analysis, showing all calculations, and then interpret the result, ultimately advising whether the project should be undertaken or not ie: was the NPV positive or negative etc. This is a problem completely of your own design, so have fun with being in control of all of the relevant information. Also be especially careful that you use the correct table/table value from which to perform the present value computation.
Explanation / Answer
Answer:
Since we are not given any specific scenario for healthcare organization’s investment project so let us assume a scenario where a leading health care organization “Metro lifeline: is planning to buy a MRI machine”
Scenario:
Metro life line would buy the MRI machine for a cost $ 5000000 and would last for 10 years after which Metro lifeline is expecting to sell off the MRI machine for $400000. The depreciation would be charged over 10 years with straight line basis. The Metro lifeline is expecting a increase in treatment fees by $1200000 per year. The new machine would increase the existing costs by $300000 per year. Existing tax rate for Metro life line is 30% however to promote the hospitals to install better infrastructure the effective tax rate is 20%. The trustees of Metro lifeline usually discount the other projects with 10% expected returns.
Calculation of Net present value:
Net present value is given by present value of Inflows less present value of outflows.
Initial investment : 5000000
Cash Flow per year :
Incremental treatment fees from MRI machine 1200000
Less : Increase in expense: 300000
Therefore net increase in fees collection: 900000 - 180000(less tax 20%) = 720000
Depreciation: 5000000-400000/10 = 460000
Tax savings in depreciation: 20% of 460000 = 92000
Net cash flows : Incremental fees collection + tax savings on depreciation = 720000 + 92000 = 812000
Present value factor for 10 years at 10% = 6.14457
Present value of cash flow = 812000 * 6.14457 = 4989390.84
Terminal cash Flow
Salvage value : 400000
Less tax : 20% of 400000 = 80000
After tax salvage value = 320000
Present value of salvage = 320000 * Present value factor for 10years at 10% i.e 0.38554= 123372.80
Therefore Net present value : Present value of cash flows + terminal value – initial cash outflow
4989390.84 + 123372.80 – 5000000 = 112763.64
Interpretation of above:
Therefore Metro lifeline have a net present value of $112763.64. which means if Metro lifeline will have a net present benefit of 112763.64 if it purchases MRI machine.
As per NPV analysis if a project has a Positive NPV then project should be accepted.