Project Evaluation Report for Greenacre Hospice: Finance for Managers

This report evaluates potential projects for Greenacre Hospice, focusing on financial analysis and non-financial factors. The analysis includes three proposals: running a cafe with volunteers, leasing the cafe to external vendors, and modernizing the cafe for hospital management. The report emphasizes the importance of Net Present Value (NPV) in project selection, highlighting the third option as the most viable due to its higher NPV. It also stresses the significance of considering various financial parameters, such as growth rates, assumptions, and interest rates, and the impact of these factors on project profitability. The report further discusses the importance of different financial areas, including the cost of capital and the balance between financing sources. Non-financial factors, such as employee availability and allocation, are also considered. The report concludes with recommendations on evaluating projects, including determining NPV, analyzing finance costs, and considering the impact of employee allocation on catering operations. The report uses sensitivity analysis with varying interest rates to assess the robustness of the project's financial viability.

FINANCE FOR MANAGERS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
(1) Preferred option for the hospital and parameters for evaluation.....................................3
(2) Importance of different financial areas.............................................................................4
(3) Evaluation of option and other non-financial factors that need to be considered while
making decisions....................................................................................................................5
(4) Recommendations of the ways in which organization can evaluate a project .................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7
APPENDIX......................................................................................................................................8

To
The Top managers of Greenacre Hospice
Date: 17-08-2016
Subject: Evaluate of projects
INTRODUCTION
Project evaluation is a difficult task and for selecting the most appropriate one, lots of
things are needed to be considered. In this report, results produced by excel sheet are evaluated.
Apart from that, non-financial factors are identified that may affect the profitability of project.
At the end of report, conclusion is prepared on the basis of entire work.
(1) Preferred option for the hospital and parameters for evaluation
Proposals that are put forth by management accountant are given below.
Proposal 1- Cafe will be run continuously be volunteers
Proposal 2- Giving cafe on lease either to Starbucks or Greasy Joe's
Proposal 3- Modernizing cafe which will be run by hospital department
On analysis of all three options that are available, third alternative seems to be viable for
the hospital. This is because; net present value of third alternative is higher than the second
option. From the spreadsheet provided by management accountant, it can be observed that net
present value of second alternative is 7, 06,625 and same of other project that comes in these
options is 7,37,348. Net present value of third option under which cafe will be modernized is 8,
08,251. On the basis of higher NPV, third option is assumed to be the preferred alternative from
outside (Net present value, 2013). There are number of parameters that must be considered for
the evaluation of project. Some of them are given as below:
 For the estimation of cash flows, growth rate is assumed and used for the calculation. In
meeting, it is important to make sure that annual growth rate that is taken for projection
of cash flows is reliable. It is practically possible to earn profit at the rate that is selected
for computing future cash flows.
 There are many assumptions that are made by the management accountant for making
projections (Bamber, Jiang and Wang, 2010). Detailed analysis of these assumptions
must be another parameter for evaluation. This is because; if things that are assumed

will be wrong then non-viable project can be selected for the hospital.
 Interest rate that is taken in to computation that is challenged from outside. It is also one
of the most important parameter of project evaluation. In projections interest rate is 10%
which is loan rate for debt taken for 2-3 years. Here, property is given on lease for 10
years. For such duration loans are available at 6%. Hence, under sensitivity analysis
from 6-10% interest rate is considered and present values cash flows are again computed
at different interest rates. Due reduction in interest rates profitability of both options also
increases.
(2) Importance of different financial areas
There are different financial areas that must be kept in mind while deciding whether
specific proposal must be selected and if so, then on what basis it should be run have to be
determined. The first financial area that needs to be considered is cost of capital that hospital
needs to pay in case if it takes debt from bank. Some objectives and limitations in this regard
are given as below:
Objectives
Main objective while taking loan must raise debt at minimum interest rate so that cost of
finance can be kept low to maximum possible level.
Limitations
If loan will be taken then it may badly affect the hospital’s financial condition. In case if
hospital will face any financial crunch due to low profitability or sudden plunge in operating
cost then finance cost may further bring down its profit (Kolk and Pinkse, 2010). Hence, in the
future, condition may become worse. This is evidenced from current financial condition of
Tesco.
Hospital needs to evaluate its sources of finance and to meet the financial requirement, it
needs to prepare a balance between them so that cost of finance can be minimized as much as
possible. In order to finance entire capital investment, some amount that is received through
donations and banks can be used in specific proportion. This will certainly help the firm in
controlling its cost. Objectives and limitations are given as below:
Objectives
 To finance the investment amount in 50:50 ratio by using bank loan and amount

received from other authorities and To minimize finance cost to 1-2% of total expected revenue (Irwin and Scott, 2010)
Limitations
Amount received from other authorities will not be utilized appropriately then they may
abstain from giving a financial support to the hospital. Further, image of hospital can tarnish
among the stakeholders.
(3) Evaluation of option and other non-financial factors that need to be considered while
making decisions
As mentioned earlier, on the basis of available options, third alternative is modernization
of cafe which will be run by the hospital’s catering department seems to be viable. On the basis
of higher NPV, this alternative is assumed to be profitable for the hospital. Some non-financial
factors that need to be considered are given as below:
 First of all, it must be identified that whether in accordance with the catering work, there
are sufficient number of employees in hospital or not. If there are abundant number of
employees then it is necessary to identify the person who will work in cafe (Simons,
2013). If there is less number of employees in the catering department then it is
important to make projections salary that will be given to them for working in cafe. New
employees will be hired then again financial projections need to be made.
 The second non-financial factor that which needs to be considered is that if employee
for cafe will be picked up from the current workforce of catering department, then how
much allocation of same will be done for cafe so that operations of catering department
would not get affected and will be performed smoothly.
(4) Recommendations of the ways in which organization can evaluate a project
Some recommendations on the ways in which hospital can evaluate a project is given as
below:
 Number of employees that are currently in catering department must be identified and it
must find out that if some of them are employed in cafe then whether such kind of
decision will hamper the operations of catering department or not.
 Managers must determine the net present value that project must have. By comparing
the standard NPV value with same project, more wise decision can be taken by the

management.
 Finance cost as the percentage of revenue must be determined to maximize profits and
to ensure that reasonable amount of interest is paid to the bank (Shiller, 2013). Finance
cost as a percentage of revenue may breach the determined level. If this will happen then
to some extent, project’s profitability will be declined by extra percentage that is
covered by the finance cost of revenue above breached level.
CONCLUSION
On the basis of above discussion, it is concluded that project must be selected on the
basis of results produced by project evaluation methods. Along with that, report shows that
there are number of non-financial factors that need to be considered while evaluating a project
to make a wise decision. These factors may affect the profitability of project.

REFERENCES
Books and Journals
Bamber, L. S., Jiang, J. and Wang, I. Y., 2010. What's my style? The influence of top managers
on voluntary corporate financial disclosure. The accounting review. 85(4). pp.1131-1162.
Irwin, D. and Scott, J. M., 2010. Barriers faced by SMEs in raising bank finance. International
journal of entrepreneurial behavior & research. 16(3). pp.245-259.
Kolk, A. and Pinkse, J., 2010. The integration of corporate governance in corporate social
responsibility disclosures. Corporate Social Responsibility and Environmental
Management. 17(1). pp.15-26.
Shiller, R. J., 2013. Finance and the good society. Princeton University Press.
Simons, R., 2013. Levers of organization design: How managers use accountability systems for
greater performance and commitment. Harvard Business Press.
Online
Net present value. 2013. [Online]. Available through: <http://www.mathsisfun.com/money/net-
present-value.html>. [Accessed on 16th August 2016].

APPENDIX
Table 1: Option 2 sensitivity analysis when interest rate reduced from 10% to 6%
Years 0 1 2 3 4 5 6 7 8 9 10
6% 1 94% 89% 84% 79% 75% 70% 67% 63% 59% 56%
1,15,0
00 pa
1,08,4
91
1,02,3
50
96,55
6
91,09
1
85,93
5
81,07
0
76,48
2
72,15
2
68,06
8
64,21
5
1,20,0
00 pa
1,13,2
08
1,06,8
00
1,00,7
54
95,05
1
89,67
1
84,59
5
79,80
7
75,28
9
71,02
8
67,00
7
Option Two Total Net Present Value
Starbucks 8,46,410
Greasy Joe's 8,83,210
Table 2: Option 3 sensitivity analysis when interest rate reduced from 10% to 6%
Years 0 1 2 3 4 5 6 7 8 9 10
6% 1 94% 89% 84% 79% 75% 70% 67% 63% 59% 56%
T0 15,000
15,00
0
T0 30,000
30,00
0
T0 50,000
50,00
0
T1-10 45,000
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0

95,00
0 45000
4500
0
4500
0
4500
0
4500
0
4500
0
4500
0
4500
0
4500
0
4500
0
PV of
costs
4,26,2
04
95,00
0
42,45
3
40,05
0
37,78
3
35,64
4
33,62
7
31,72
3
29,92
8
28,23
4
26,63
5
25,12
8
1,92,0
00
1,81,1
32
1,70,
879
1,61,
207
1,52,
082
1,43,
474
1,35,
352
1,27,
691
1,20,
463
1,13,
645
1,07,
212
Option Three Total Net Present Value
Flat Rate 9,86,933
Discount rate 7%
Table 3: Option 2 sensitivity analysis when interest rate reduced at 7%
Years 0 1 2 3 4 5 6 7 8 9 10
7% 1 93% 87% 82% 76% 71% 67% 62% 58% 54% 51%
1,15,0
00 pa
1,07,4
77
1,00,4
45
93,87
4
87,73
3
81,99
3
76,62
9
71,61
6
66,93
1
62,55
2
58,46
0
1,20,0
00 pa
1,12,1
50
1,04,8
13
97,95
6
91,54
7
85,55
8
79,96
1
74,73
0
69,84
1
65,27
2
61,00
2
Option Two Total Net Present Value
Starbucks 8,07,712
Greasy Joe's 8,42,830
Table 4: Option 3 sensitivity analysis when interest rate reduced at 7%
Years 0 1 2 3 4 5 6 7 8 9 10

7% 1 93% 87% 82% 76% 71% 67% 62% 58% 54% 51%
15,000
15,00
0
30,000
30,00
0
50,000
50,00
0
45,000 45,000
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
95,00
0 45000 45000 45000 45000 45000 45000 45000 45000 45000 45000
4,11,06
1
95,00
0 42,056
39,30
5
36,73
3
34,33
0
32,08
4
29,98
5
28,02
4
26,19
0
24,47
7
22,87
6
1,92,00
0
1,79,4
39
1,67,7
00
1,56,7
29
1,46,4
76
1,36,8
93
1,27,9
38
1,19,5
68
1,11,7
46
1,04,4
35
97,60
3
Option Three Total Net Present Value
Flat Rate 9,37,466
Discount rate 8%
Table 5: Option 2 sensitivity analysis when interest rate reduced at 8%
Years 0 1 2 3 4 5 6 7 8 9 10
8% 1 93% 86% 79% 74% 68% 63% 58% 54% 50% 46%
1,15,0
00 pa
1,06,4
81
98,59
4
91,29
1
84,52
8
78,26
7
72,47
0
67,10
1
62,13
1
57,52
9
53,26
7

1,20,0
00 pa
1,11,1
11
1,02,8
81
95,26
0
88,20
4
81,67
0
75,62
0
70,01
9
64,83
2
60,03
0
55,58
3
Option Two Total Net Present Value
Starbucks 7,71,659
Greasy Joe's 8,05,210
Table 6: Option 3 sensitivity analysis when interest rate reduced at 8%
Years 0 1 2 3 4 5 6 7 8 9 10
8% 1 93% 86% 79% 74% 68% 63% 58% 54% 50% 46%
15,000
15,00
0
30,000
30,00
0
50,000
50,00
0
45,000 45,000
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
95,00
0 45000 45000 45000 45000 45000 45000 45000 45000 45000 45000
3,96,95
4
95,00
0 41,667
38,58
0
35,72
2
33,07
6
30,62
6
28,35
8
26,25
7
24,31
2
22,51
1
20,84
4
1,92,00
0
1,77,7
78
1,64,6
09
1,52,4
16
1,41,1
26
1,30,6
72
1,20,9
93
1,12,0
30
1,03,7
32
96,04
8
88,93
3
Option Three Total Net Present Value
Flat Rate 8,91,382

Discount rate 9%
Table 7: Option 2 sensitivity analysis when interest rate reduced at 9%
Years 0 1 2 3 4 5 6 7 8 9 10
9% 1 92% 84% 77% 71% 65% 60% 55% 50% 46% 42%
1,15,0
00 pa
1,05,5
05
96,79
3
88,80
1
81,46
9
74,74
2
68,57
1
62,90
9
57,71
5
52,94
9
48,57
7
1,20,0
00 pa
1,10,0
92
1,01,0
02
92,66
2
85,01
1
77,99
2
71,55
2
65,64
4
60,22
4
55,25
1
50,68
9
Option Two Total Net Present Value
Starbucks 7,38,031
Greasy Joe's 7,70,119
Table 8: Option 2 sensitivity analysis when interest rate reduced at 9%
Years 0 1 2 3 4 5 6 7 8 9 10
9% 1 92% 84% 77% 71% 65% 60% 55% 50% 46% 42%
15,000
15,00
0
30,000
30,00
0
50,000
50,00
0
45,000 45,000
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
45,00
0
95,00
0 45000 45000 45000 45000 45000 45000 45000 45000 45000 45000

3,83,79
5
95,00
0 41,284
37,87
6
34,74
8
31,87
9
29,24
7
26,83
2
24,61
7
22,58
4
20,71
9
19,00
8
1,92,00
0
1,76,1
47
1,61,6
03
1,48,2
59
1,36,0
18
1,24,7
87
1,14,4
83
1,05,0
31
96,35
8
88,40
2
81,10
3
Option Three Total Net Present Value
Flat Rate 8,48,396
Discount rate 10%
Table 9: Option 2 sensitivity analysis when interest rate reduced at 10%
Years 0 1 2 3 4 5 6 7 8 9 10
10% 1 91% 83% 75% 68% 62% 56% 51% 47% 42% 39%
1,15,0
00 pa
1,04,5
45
95,04
1
86,40
1
78,54
7
71,40
6
64,91
5
59,01
3
53,64
8
48,77
1
44,33
7
1,20,0
00 pa
1,09,0
91
99,17
4
90,15
8
81,96
2
74,51
1
67,73
7
61,57
9
55,98
1
50,89
2
46,26
5
Option Two Total Net Present Value
Starbucks 7,06,625
Greasy Joe's 7,37,348
Table 10: Option 2 sensitivity analysis when interest rate reduced at 10%
Years 0 1 2 3 4 5 6 7 8 9 10
10% 1 91% 83% 75% 68% 62% 56% 51% 47% 42% 39%
T0 15,000 15,00