Allegheny Community Hospital is a nonprofit hospital operated by the county. The hospital's administrator is considering a proposal to open a new outpatient clinic in the nearby city of New Castle. The administrator has made the following estimates pertinent to the proposal. 1. Construction of the clinic building will cost $980,000 in two equal installments of $490,000, to be paid at the end of 20x0 and 20x1. The clinic will open on January 2, 20x2. All staffing and operating costs begin in 20x2. 2. Equipment for the clinic will cost $140,000, to be paid in December of 20x1. 3. Staffing of the clinic will cost $860,000 per year. 4. Other operating costs at the clinic will be $194,000 per year. 5. Opening the clinic is expected to increase charitable contributions to the hospital by $280,000 per year. 6. The clinic is expected to reduce costs at Allegheny Community Hospital. Annual cost savings at the hospital are projected to be $1,060,000. 7. A major refurbishment of the clinic is expected to be necessary toward the end of 20x5. This work will cost $170,000. 8. Due to shifting medical needs in the county, the administrator doubts the clinic will be needed after 20x9. 9. The clinic building and equipment could be sold for $280,000 at the end of 20x9. 10. The hospital's hurdle rate is 12 percent. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1-3. Fill in the following table to compute the net present value of the proposed outpatient clinic. 4. Should the administrator recommend to the hospital's trustees that the clinic be built?
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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