Week 7 Assignment

MMHA 6999

Dr. McDonald
 Week 7 Assignment: Financial Analysis

Scenario 1: ABC Hospital

Due to the increased cases of cancer patients in the local area it has been evident that this

number of cancer patients would increase over the period of time due to which I have decided

to invest approx. $11.95m in developing the cancer facility in the area to cope the needs and

demand of the area and it would also result in increased revenue for the institute.

Present Value FE Y1 FE Y2 FE Y3 FE Y4

Year 1 $1,836,547.29 $2,000,000

Year 2 $3,372,905.95 $4,000,000

Year 3 $3,871,563.31 $5,000,000

Year 4 $5,688,247.28 $8,000,000

Total PV of $14,769,264.00

FE

Investment $-11,995,000.00

Net PV $2,774,264.00
Since the investment is for the longer period of time approx for the period of 6 years and in the

first year only investment of $11.95 would be incurred and then over the period of time

cash flows are expected in good amounts due to the demand of cancer facility in the

locality, the cash flows are discounted to their present values to get the idea of whether

the investment made is viable or not for doing that weighted average cost of capital is

also used which is 9% it is used to discount the cash flows.

It has always been seen that the resources to invest are limited whereas the oppportunities for

investments are in great in number and to avoid the confusion that in which project the

investment should be made the financial management techniques are used to decide in which

project the investment should be made, and in this case net present value calculation has been

used the cash flows which are expected over the period are discounted to their present value by

using wacc and after calculating the cash flows to their present values it is viable to invest in the

cancer facility project

$14,769,264.00 - $11,995,000.00 = $2,774,264.00

Scenario 2: Serenity Health Care

The option to acquire Hall healthcare system is been considered by the serenity hospital

management for quite some time but before doing that few calculations were performed in

order to determine whether acquiring the facility would be feasible for the hospital or not? The

ratios performed for doing that includes current and quick ratio

2015 2014

Total current assets / $13,848,196 / $18,779,217 /

Total current $12,934,411 $19,708,798

liabilities

Current Ratio 1.07 0.95

Total current assets $11,180,805 / $13,189,141 /

less inventory / Total $12,934,411 $19,708,798

current liabilities

Acid Ratio 0.86 0.67

The first ratio calculated is current ratio which is calculated by dividing current assets with the

current liabilities in order to determine the performance of the facility, the ideal current ratio is

considered to be between 1 to 2 and in the year 2014 the current ratio is below than 1 and in
2015 it is slightly above than 1, which may be considered good as it falls between the ideal

benchmark of the current ratio.

The second ratio calculated is quick ratio it is calculated by dividing the current assets minus

inventories by current liabilities to determine the position of the facility. And the ratio

calculated for the year 2014, and 2015 is 0.67 and 0.86 respectively which is alarming that the

major problem lies in the current assets of the facility.

By calculating the above ratios and considering all the facts and figures it is quite clear that investing in

the facility is quite risky as it would result in the loss of revenue and other disadvantages may occur for

the hospital if they opt for the partnership. It would also require high investment of millions of dollars and

it is also not feasible that even if the investment would be recovered or not? Due to considering all these

scenarios I would recommend that not to invest in the facility.

Scenario 3: Montgomery Home and Community-Based Services

The CEO has some believes in the facility that the partnership would incur and result in positive

results for the hospital and they will be able to recover their initial investment in maximum time

of three years and after that they will enter into making profits some more calculations namely

payback and breakeven analysis have been performed to further dig into the situation.

1. The First calculation or ratio calculated is breakeven analysis it shows at which point the

hospital will enter into no profit no loss situation also how many patients the hospital

would need to treat in order to meet only its expenses and not making a profit just recover

the expenses incurred.

Fixed costs / (avg charge per client – avg $6,090 / ($200-$145)

variable cost per client) =

Break-even 111 clients

By looking at the above calculation it has been evident that the hospital would need to treat 111

number of patients in order to reach at the breakeven point or where it would reach at the no

profit no loss situation and where it would only be able to meet its expenses and currently there

are only 15 patients and it would take more than 3 years to reach at the breakeven point, it would

be decided by the CEO that whether he can take that risk to wait till three years just to meet the

breakeven of the hospital or not?

 2. The second calculation done is the payback calculation it helps in determining that how

much time it would take the hospital to recover its initial investment, currently the CEO

is allowing a period of 3 years at maximum to recover the initial investment.

Year Yearly Cash Flow Cumulative Cash Flow

0 ($317,880) ($317,880)

1 $25,700 ($292,180)

2 $40,000 ($252,180)

3 $78,000 ($174,180)

4 $225,000 $50,820

5 $310,000 $360,820

Payback Period = A + (B/C)

4.14 = 4 + (50,820/360,820)

By looking at the result of the payback calculation which is quite over 4 years which is means it

would take the hospital more than 4 years just to recover its initial investment and as mentioned

above the CEO is allowing the time of maximum 3 years to recover the initial investment and it

can be said that by looking at this result of PAYBACK the CEO will not support this investment.