Running Head: Planning and Budgeting Planning and Budgeting Planning and Budgeting A major investment for Prime Care Heart Clinic Net Present Value Prime Care Heart Clinic is considering the purchase of a Radiology Equipment. To invest in this machine, it is important to calculate the equipments Net Present Value. The equipment costs &7,000 and lasts for a period of 4 years. The clinic estimates that the equipment will provide it with income of $2,000 per year which is net of the maintenance costs. The scrap value of the equipment after 4 years is estimated at $500.
To determine whether to purchase the machine, NPV must be determined and the future and present income that it receives from the purchase of the equipment. Table 1: NPV of the equipment at a 6% interest rate Year Outlay (−) or income Present value calculation Present value of outlay (−) or income 0 −$7,000 — −$7,000 1 2,000 $2,000/(1.06)1 1,887 2 2,000 2,000/(1.06)2 1,780 3 2,000 2,000/(1.06)3 1,679 4 2,500 2,500/(1.06)4 1,980 Total net present value: $326 The low interest rate results into a positive NPV and this makes the equipment worthy of investment. Pertinent financial ratios Financial ratios are used as indicators of performance.
In order to make the right investment decision on the equipment, the clinic should account for the whole lifecycle costs which include the installment of the infrastructure, maintenance as well as its disposal. Profitability analysis of the equipment will take into considerations all the costs that were borne over the whole life cycle of the equipment. The liquidity and profitability ratios of Prime Care Heart Clinic clearly indicate that the clinic is in a healthy financial position and this ratio indicates that the equipment installation of the new equipment will be profitable for the clinic. Break even analysis It defines the point at which an investment will generate positive returns.
Total costs = $ 7,000 Total revenue per each screening is $67.00 $81, 000/ $67 = 1, 208 screenings as the break even point At $67, the clinic must perform 1, 208 screenings per month in order to break even. At this point, no profit or loss is made. For this investment to generate positive returns, the clinic must perform more than the break even screenings per month. It is recommendable for Prime Care Heart Clinic to invest in the radiology equipment as the rates of return from the equipment are quite favorable for the clinic both in the short term and in the long term.
Addressing financial risks and required returns The most likely way for Prime Care Heart Clinic should address financial risk and required returns are to align them with the business model. A business model is a framework which is used for the achievement of goals. In the business model, each manager has the responsibility to supervise a given number of functions, subordinates or even subordinates.
The manager also has the sole responsibility to oversee a limited number of initiatives, financial risks and the required returns from the investments. To address its financial risks and the required returns, Prime Care Heart Clinic should align its hierarchy of risk categories in accordance with its business model. References John J. Hampton, (2011). The AMA Handbook of Financial Risk Management. AMACOM Div American Mgmt Assn Richard Field, (2012). Planning and Budgeting Skills for Health and Social Work Managers. SAGE