Strategic Decision Making for Metropolis Health System
Metropolis Health System needs to take the proper strategic decisions to increase the overall return on business. It is analyzed that in order to determine the best project, company needs to follow the proper capital budgeting process. The main objective of this capital budgeting process is to determine whether the particular project is acceptable or not. However, there are other alternatives which are undertaken such as ratio analysis, profitability index, du pont analysis and ROI investment method (Zhang, Huang, & Zhang, 2015).
There are several health care services which will be offered by Metropolis Health System to its clients which will increase its overall revenue and sales throughout the time (Abor, 2017).
Total output and nursing services will include all the nursing Services Routine Medical-Surgical Operating Room Intensive Care Units OB-Nursery Other Total services. However, there will be yearly $ 10,000 increment in the overall sales of the services offered in market (Andor, Mohanty, & Toth, 2015).
|
Years |
Total output and revenue |
|
1 |
$ 250000 |
|
2 |
$ 260000 |
|
3 |
$270000 |
|
4 |
$ 280000 |
|
5 |
$ 290000 |
It is analyzed that there will be several types of resources and quantity needed to run the hospital health care services (Goyat, & Nain, 2016).
|
Type of services |
Quantity |
|
General services resources |
2*50000= $1,00,000 |
|
Routine revenue Laboratory Radiology and |
3*40,000=1,20,000 |
|
Physical therapy EKG and EEG Ambulance service Oxygen |
4*50,000=1,00,000 |
|
Home health and hospice Substance abuse |
2*50000= $1,00,000 |
|
Emergency service Medical and surgical supply and IV Operating rooms |
3*40,000=1,20,000 |
|
CT scanner OB-nursery Pharmacy |
4*50,000=1,00,000 |
|
Anesthesiology Respiratory therapy |
5*40,000=20,0000 |
|
Total Cash outflow |
$ 8,40,000 |
The net present value is a capital budgeting technique which measures the profitability and feasibility of a project. It is a simple accounting difference between the present values of cash inflows and present values of cash outflows.
|
Computation of the Net present Value of the Company |
|||
|
Year |
Cash inflow |
PV factor (10%) |
P.V. Amount of Flows |
|
0 |
$ (840,000.00) |
1 |
$ (840,000.00) |
|
1 |
$ 250,000.00 |
0.909090909 |
$ 227,272.73 |
|
2 |
$ 260,000.00 |
0.826446281 |
$ 214,876.03 |
|
3 |
$ 270,000.00 |
0.751314801 |
$ 202,855.00 |
|
4 |
$ 280,000.00 |
0.683013455 |
$ 191,243.77 |
|
5 |
$ 290,000.00 |
0.620921323 |
$ 180,067.18 |
|
Total Cash inflow |
$ 1,016,314.71 |
||
|
Net Present Value |
$ 1,856,314.71 |
The net present value of company is positive and showing $ 1856314.71 cash inflow in business. It is analyzed that high net present value of company reflects positive cash inflow which will add value of the invested capital (Hayward, et al. 2017).
|
Sensitivity analysis of the total cash inflow arise by selling MHS services in market |
|||||||||
|
Normal option |
Sensitive option |
||||||||
|
Input |
Input |
||||||||
|
R |
10% |
r |
10 |
||||||
|
S |
0.2 |
s |
0.2 |
||||||
|
T |
5 |
T |
5 |
||||||
|
Strike K |
$ 1,856,314.71 |
Strike K |
2000000 |
||||||
|
Prices |
Prices |
||||||||
|
$ 185,631.47 |
$ 1.25 |
|
$ 200,000.00 |
$ 200,000.00 |
$ – |
||||
|
$ 371,262.94 |
$ 602.31 |
$ – |
$ 400,000.00 |
$ 400,000.00 |
$ – |
||||
|
$ 556,894.41 |
$ 8,586.93 |
$ – |
$ 600,000.00 |
$ 600,000.00 |
$ – |
||||
|
$ 742,525.88 |
$ 38,199.92 |
$ – |
$ 800,000.00 |
$ 800,000.00 |
$ – |
||||
|
$ 928,157.35 |
$ 99,192.63 |
$ – |
$ 1,000,000.00 |
$ 1,000,000.00 |
$ – |
||||
|
$ 1,113,788.82 |
$ 192,138.26 |
$ – |
$ 1,200,000.00 |
$ 1,200,000.00 |
$ – |
||||
|
$ 1,299,420.30 |
$ 312,041.29 |
$ – |
$ 1,400,000.00 |
$ 1,400,000.00 |
$ – |
||||
|
$ 1,485,051.77 |
$ 452,415.85 |
$ – |
$ 1,600,000.00 |
$ 1,600,000.00 |
$ – |
||||
|
$ 1,670,683.24 |
$ 607,419.06 |
$ – |
$ 1,800,000.00 |
$ 1,800,000.00 |
$ – |
||||
|
$ 1,856,314.71 |
$ 772,510.65 |
$ – |
$ 2,000,000.00 |
$ 2,000,000.00 |
$ – |
||||
|
$ 2,041,946.18 |
$ 944,419.01 |
$ 185,631.47 |
$ 2,200,000.00 |
$ 2,200,000.00 |
$ 200,000.00 |
||||
|
$ 2,227,577.65 |
$ 1,120,883.16 |
$ 371,262.94 |
$ 2,400,000.00 |
$ 2,400,000.00 |
$ 400,000.00 |
||||
|
$ 2,413,209.12 |
$ 1,300,376.93 |
$ 556,894.41 |
$ 2,600,000.00 |
$ 2,600,000.00 |
$ 600,000.00 |
||||
|
$ 2,598,840.59 |
$ 1,481,883.36 |
$ 742,525.88 |
$ 2,800,000.00 |
$ 2,800,000.00 |
$ 800,000.00 |
||||
|
$ 2,784,472.06 |
$ 1,664,728.94 |
$ 928,157.35 |
$ 3,000,000.00 |
$ 3,000,000.00 |
$ 1,000,000.00 |
||||
|
$ 2,970,103.53 |
$ 1,848,468.48 |
$ 1,113,788.82 |
$ 3,200,000.00 |
$ 3,200,000.00 |
$ 1,200,000.00 |
||||
|
$ 3,155,735.00 |
$ 2,032,807.46 |
$ 1,299,420.30 |
$ 3,400,000.00 |
$ 3,400,000.00 |
$ 1,400,000.00 |
||||
|
$ 3,341,366.47 |
$ 2,217,550.48 |
$ 1,485,051.77 |
$ 3,600,000.00 |
$ 3,600,000.00 |
$ 1,600,000.00 |
||||
|
$ 3,526,997.94 |
$ 2,402,567.39 |
$ 1,670,683.24 |
$ 3,800,000.00 |
$ 3,800,000.00 |
$ 1,800,000.00 |
||||
|
$ 3,712,629.42 |
$ 2,587,771.06 |
$ 1,856,314.71 |
$ 4,000,000.00 |
$ 4,000,000.00 |
$ 2,000,000.00 |
This sensitivity analysis reflects the changes in the cash inflow which MHS organization will have if there are changes in internal and external market factors (Hayward, et al. 2017).
In order to increase its overall sales and turnover of business, the new service which needs to be introduced in market is Emergency service Medical and surgical supply and IV Operating rooms. These are the services which are offered in market to satisfy the patients’ needs and demand related to their health care program (Graham., Harvey, & Puri, 2015).
The budget is the predetermined estimation of the expense and cash outflow required to maintain the operation of the services offered in market. It is the amount of capital required to operate new patient care services. However, the budget would be $ 8, 40,000 which is computed after considering all the required expenses and resources for starting up this new MHS service in market. However, budget is the only estimation of the future expenses and required amount which will be needed for starting up new services in market. Ideally, budget is prepared when company wants to forecast the actual amount of expenses and required capital in the future. It is advisable for the organization to add on the escalation amount which will support the funding of the newly introduced services in market.
It is analyzed that NPV of the company is showing the positive outcome of $ 1,856,314.71 which is favorable for accepting this new project. However, after considering the sensitive analysis, it is considered that if there is changes in external factors of the business, company will be having the positive outcomes for this project.
References
Abor, J. Y. (2017). Evaluating Capital Investment Decisions: Capital Budgeting. In Entrepreneurial Finance for MSMEs (pp. 293-320). Palgrave Macmillan, Cham.
Andor, G., Mohanty, S. K., & Toth, T. (2015). Capital budgeting practices: A survey of Central and Eastern European firms. Emerging Markets Review, 23, 148-172.
Goyat, S., & Nain, A. (2016). Methods of Evaluating Investment Proposals. International Journal of Engineering and Management Research (IJEMR), 6(5), 278-280.
Graham, J. R., Harvey, C. R., & Puri, M. (2015). Capital allocation and delegation of decision-making authority within firms. Journal of Financial Economics, 115(3), 449-470.
Hayward, M., Caldwell, A., Steen, J., Gow, D., & Liesch, P. (2017). Entrepreneurs’ capital budgeting orientations and innovation outputs: Evidence from Australian biotechnology firms. Long Range Planning, 50(2), 121-133.
Zhang, Q., Huang, X., & Zhang, C. (2015). A mean-risk index model for uncertain capital budgeting. Journal of the Operational Research Society, 66(5), 761-770.
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