Capital Budgeting for Trinity Hospital - Case Study Example

The paper "Capital Budgeting for Trinity Hospital" is a perfect example of a case study on finance and accounting. This particular SLP deals with the capital budgeting for Trinity Hospital’s project which is based upon the establishment of the new cancer research wing. This project is estimated to incur a cost of around $1 million and it will be completed in a period of years. It is assumed that the cost of capital would remain 15%. The new research wing is expected to generate around $250,000 in the second year and $500,000 in the next year. Revenues are projected to be increased by 25% each year after the second year. So as part of capital budgeting analysis of this new facility, NPV, IRR, MIRR, Discounted Payback Period and Profitability Index are calculated.

On the basis of the above computations, the financial aspects of the company seem pretty sound. Overall, the company is in a very healthy financial position based on the financial highlights. There seems no uncertainty in the upcoming five years as per the prediction of cash flows. In the following paragraphs, item wise scrutiny is conducted to reflect the true financial forecast of the company with different financial projection techniques.

NPV

As far as NPV of the project is concerned, a very handsome figure of around $0.8 million suggests that this project would be extremely viable for the company. Hence on this basis of NPV, the project can be selected by the company.

IRR

IRR of this project is also very attractive, generating a yield of around 42%, therefore on the basis of IRR, this project is highly profitable and should be opted by the company.

MIRR

Since no reinvestment rate was given in the scenario, therefore it is assumed that the company would be reinvesting every earned cash flow at the rate of 20%. As a result of assuming this rate, Modified IRR is calculated and yields around 33% return which is also very attractive.

Discounted Payback Period

So far as Discounted Payback is concerned, this project would be covering all its initial investment near to the end of year 3 which is also very fruitful for the company as the company can enjoy the year 4 and 5 cash flows free.

Profitability Index

Profitability Index is a derived technique of NPV. PI of greater than 1 also suggests that the project is viable. So for this project, PI is computed and the value arrived is 1.94 which suggests that the project is more than acceptable for the company.

Recommendation

On the basis of the above commentary on the financial aspect of this project, it is advised to the company that they should select this project but must also consider the relevant qualitative factors that run beside the quantitative factors.