# Capital budgeting and financial analysis

**Question description**

**1 Discuss one Ratio that is used to evaluate capital budget performance** (Refer to Section of Evaluating Capital Budgeting Performance from Nowicki’s Chapter 13)

**2 Discuss two operating indicators for healthcare organizations** (Refer to Section of Operating Indicators from Nowicki’s Chapter 14 or Section of Operating Indicator Analysis from Capenski’s Chapter 17)

**3 Assume that you are the chief financial officer at UMUC Hospital. The CEO has asked you to analyze a proposed capital investment—Project X. This project requires a net investment outlay of $10,000, and the cost of capital is 12%. The project’s expected net cash flows are:**

**Year 0: -$10,000**

**Year 1: $6,500**

**Year 2: $3,000**

**Year 3: $3,000**

**Year 4: $1,000**

**a)** Calculate the present value of each year’s cash inflow.

**b)** Calculate this project’s “discounted” payback period. (Refer to Problem 13.3 in the Section of Steps in the Capital Budgeting Process from Nowocki’s Chapter 13. Hint: “Discounted” payback period is the calculation of payback period using present value of each year.)

**c)** Calculate the net present value (NPV).

**d)** Calculate the internal rate of return (IRR). (Using Excel : if you have **-10000** in Cell A3, 6500 in Cell A4, 3000 in Cell A5, 3000 in Cell A6, 1000 in Cell A7, then in a blank cell type: +IRR(A3:A7) and you will get the answer. Note that by default this function is set to guess the IRR= 10% from the beginning.)

**e)** Do you think this project financially acceptable? Explain your answer based on the above calculated results.

## Tutor Answer

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