Capital Budgeting

There are many options to buy capital, including cash purchases, loans, leasing, and other forms of payment. Your goal as a healthcare manager is to determine which method is best for your organization, given its financial and organizational structure (i.e., for-profit or not-for-profit). Time value of money and net present value are two techniques that may help you determine how and when to invest in new capital. For this Assignment, you examine these concepts as they pertain to the healthcare industry.

The Assignment: Use the “ Capital Budget Excel Template” to show your work, answer the following questions:

1. If a physician deposits $25,000 today into a mutual fund that is expected to grow

at an annual rate of 8%, what will be the value of this investment:

a. 3 years from now

b. 6 years from now

c. 9 years from now

d. 12 years from now

2. The Chief Financial Officer of a hospital needs to determine the present value of

$150,000 investment received at the end of year 5. What is the present value if

the discount rate is:

a. 3%

b. 6%

c. 9%

d. 12%

3. The Ford OBGYN group purchased a new diagnostic ultrasound machine for

their office for $900,000. The expected cash flows for each year of the five year

period is

$120,000, $155,000, $186,000, $208,000, and $225,000 for the five years. What

is the internal rate of return or the IRR for the project?

4. Determine the Net Present Value for Problem 3 with an interest rate of 10%. Do

you proceed or not with the project?

5. Determine the Payback Period for Problem 3.

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