MHS Capital Budget Analysis: Investment in Healthcare Services Project

This report presents a capital budget analysis for Metropolis Health System (MHS), evaluating the feasibility of investing in new healthcare services. It identifies the goals and objectives, estimates output prices, revenue, and cash inflows, and determines the required resources and input prices. The analysis includes a net present value (NPV) computation, demonstrating a positive NPV of $1,856,314.71, indicating a favorable investment opportunity. A sensitivity analysis assesses the impact of changes in market factors on cash inflow. The report recommends introducing new services such as Emergency service, Medical and surgical supply, and Operating rooms. The budget narrative outlines the estimated expenses of $840,000 for these new services. The justification supports the project based on the positive NPV and favorable outcomes from the sensitivity analysis. The document concludes that the investment is worthwhile for MHS.

MHS
Capital Budget analysis
Name of the Author

Contents
Answer to question no-1..............................................................................................................................2
Identify the desired goals and objectives.....................................................................................................2
Answer to question no-2..............................................................................................................................2
Estimate the output price, revenue, and included amount cash received......................................................2
Answer to question no-3..............................................................................................................................3
Identify the type and quantity of resources needed, input prices.................................................................3
Answer to question no-4 and 5...................................................................................................................5
Answer to question no-6..............................................................................................................................7
Sensitivity analysis......................................................................................................................................7
Answer to question no-6...........................................................................................................................10
Justification...........................................................................................................................................11
References.................................................................................................................................................12

Answer to question no-1
Identify the desired goals and objectives
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).
Answer to question no-2
Estimate the output price, revenue, and included amount cash received
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
Answer to question no-3
Identify the type and quantity of resources needed, input prices
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

Answer to question no-4 and 5
Net present value computation
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 $ 0.620921323 $

290,000.00 180,067.18
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).

Answer to question no-6
Sensitivity analysis
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
$
-
$
1,000,000.0
0
$
1,000,000.
00
$
-
$
1,113,788.
82
$
192,138.26
$
-
$
1,200,000.0
0
$
1,200,000.
00
$
-
$
1,299,420.
30
$
312,041.29
$
-
$
1,400,000.0
0
$
1,400,000.
00
$
-
$
1,485,051.
77
$
452,415.85
$
-
$
1,600,000.0
0
$
1,600,000.
00
$
-
$
1,670,683.
24
$
607,419.06
$
-
$
1,800,000.0
0
$
1,800,000.
00
$
-

$
1,856,314.
71
$
772,510.65
$
-
$
2,000,000.0
0
$
2,000,000.
00
$
-
$
2,041,946.
18
$
944,419.01
$
185,631.47
$
2,200,000.0
0
$
2,200,000.
00
$
200,000.00
$
2,227,577.
65
$
1,120,883.1
6
$
371,262.94
$
2,400,000.0
0
$
2,400,000.
00
$
400,000.00
$
2,413,209.
12
$
1,300,376.9
3
$
556,894.41
$
2,600,000.0
0
$
2,600,000.
00
$
600,000.00
$
2,598,840.
59
$
1,481,883.3
6
$
742,525.88
$
2,800,000.0
0
$
2,800,000.
00
$
800,000.00
$
2,784,472.
06
$
1,664,728.9
4
$
928,157.35
$
3,000,000.0
0
$
3,000,000.
00
$
1,000,000.
00
$
2,970,103.
53
$
1,848,468.4
8
$
1,113,788.
82
$
3,200,000.0
0
$
3,200,000.
00
$
1,200,000.
00
$ $ $ $ $ $

3,155,735.
00
2,032,807.4
6
1,299,420.
30
3,400,000.0
0
3,400,000.
00
1,400,000.
00
$
3,341,366.
47
$
2,217,550.4
8
$
1,485,051.
77
$
3,600,000.0
0
$
3,600,000.
00
$
1,600,000.
00
$
3,526,997.
94
$
2,402,567.3
9
$
1,670,683.
24
$
3,800,000.0
0
$
3,800,000.
00
$
1,800,000.
00
$
3,712,629.
42
$
2,587,771.0
6
$
1,856,314.
71
$
4,000,000.0
0
$
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).
Answer to question no-6
Introduction of new services
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).
Budget narrative
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.
Justification
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.