Riyadh Hospital's Capital Rationing: A Case Study Analysis

This case study presents a financial analysis of capital rationing decisions for a large hospital in Riyadh. The analysis compares two investment options: constructing a five-story parking structure and expanding the operating room with robotic surgical devices. The study identifies the steps in determining funding, including sales and cash flow forecasting, and employs Net Present Value (NPV) to assess the financial feasibility of each project. The findings indicate that expanding the operating room is the more financially sound choice, as it yields a higher NPV compared to the parking structure. The case study includes detailed financial forecasts, depreciation schedules, and balance sheets, providing a comprehensive overview of the investment considerations and financial planning processes involved in making capital allocation decisions within a healthcare setting. The case study concludes that the operating room expansion is the better investment option based on the financial analysis provided.

Running head: CASE STUDY: RATIONING AVAILABLE CAPITAL
Case Study: Rationing Available Capital
Name of the Student
Name of the University
Authors Note

1CASE STUDY: RATIONING AVAILABLE CAPITAL
Table of Contents
Introduction................................................................................................................................2
Identification of process of capital investment decision making...............................................2
Steps in determining the funding...............................................................................................3
Assessment.................................................................................................................................3
Comparison and contrast of both options...................................................................................3
Conclusion..................................................................................................................................4
References..................................................................................................................................6
List of Appendix........................................................................................................................7

2CASE STUDY: RATIONING AVAILABLE CAPITAL
Introduction
The given case study is related to a proposal for approving and allocating the
necessary funds required for a large hospital in Riyadh. The two options are identified in
form of providing the cost information for a major five-story parking structure or expansion
of the operating room and including the addition of robotic surgical assisting devices. The
present proposal aims to identify the funding which will be required for the present year and
following. The main tool used for the assessment of the feasibility of the financial plan has
been considered with the application of capital investing tool NPV (Saleem, 2017).
Identification of process of capital investment decision making
The capital investing decisions are often considered with capital budgeting. The
important considerations of the investments decisions are mainly considered with allotting
the capital investment funds in the most effective manner for ensuring the best possible
returns. It needs to be seen that the cost considerations for the expansion of the operation
facility needs to be identified in terms of X-Ray Film processor table top, Ultrasound
machines, Gastroscope, Colonoscope (With halogen light source), Operating Table(hydraulic
driven), Anaesthesia trolley and Syringe pump. In addition to this, the personnel plan has
been prepared according to the requirement of the relevant staff who are needed for the
overall expansion of the facility. These includes Doctors, Nurses, Occupational therapists and
physiotherapists, Paramedics, Pharmacists and Volunteers. The cost consideration for the
new parking facility has been taken into consideration with Security Fees, Register for Tax,
Permits and Licenses, Site Survey, Paving, In and Out Gates, Website cost and Business
Insurance. Furthermore, the costs associated to the personnel selection needs to be taken into
consideration as per the Cleaning Staff and Parking Assist. The assessment of the project
needs to be taken into consideration as per appropriate and right capital investment decision.

3CASE STUDY: RATIONING AVAILABLE CAPITAL
For instance, there are few number of companies which look forward to the long-term
growth. The regulation of the capital investment decisions permits is seen to enable an
individual to ensure that the resources are allocated on an appropriate basis. The decisions
pertaining to the capital investments are mainly controlled and regulated as per organization’s
internal resources. The important form of the considerations for the expansion options has
been taken into account with the creating a feasible financial plan and for two years (Afriyie-
Darkwa, 2017).
Steps in determining the funding
The main steps in determining the funding in both the projects has been taken into
account with preparation of a sales forecast, cash flow forecast, cash flows, cash outflows,
depreciation schedule and profit and loss forecast. The next step is followed with suggesting
the highlights for growth in two years. The third stage of the projects is depicted with
formulating an upgrade plan for the business. This process is further proceeded with the
preparation of balance sheet. The fifth stage of the funding is determined with the preparation
of personnel for both the considerations. The last process is included with the application of
capital budgeting technique for the business.
Assessment
The main tool used for assessment of the cost targets project is depicted with
experience procedure. The study has focused on secondary resources about the growth
potential of parking facility and hospital. This is depicted to be conducive in understanding
the appropriate requirement of both the financial requirement and growth potentials of the
projects.

4CASE STUDY: RATIONING AVAILABLE CAPITAL
Comparison and contrast of both options
Upgrading and expanding of operating room including the addition of robotic surgical
assisting devices
The net profit for the upgrading of the operational facility is seen to be depicted with
increase of 2% for 2018 to 2019. The overall considerations under the upgrade plan is
identified with total fixed cost of AED 583150 and total start-up expenses of SAR 963400.
The total payroll of the employees is depicted to increase by SAR 334,000 and SAR 536,070.
The implementation of the capital budgeting tool for this project is determined with NPV
computation. The consideration of the discount rate of 10% is taken into account after
referring to the present discount rate of Riyadh. It needs to be seen that the total value of the
NPV for Upgrading and expanding of operating room including the addition of robotic
surgical assisting devices such as X-Ray Film processor table top, Ultrasound machines,
Gastroscope and Colonoscope taken into consideration with and amount of SAR 10817628.1
(Arabi et al., 2016).
Five-story parking structure
The net profit for the Five-story parking structure is seen to be depicted with aa
decrease of 4% for 2018 to 2019. The five-story structure is inferred with an increase in sales
of SAR 880,000 to SAR 968,000. This is clearly lesser than upgrading and expanding of
operating room including the addition of robotic surgical assisting devices. The personnel
plan has been further seen to be depicted with increase of the staff cost from SAR 3745 to
SAR 5564. The NPV for the parking facility is identified to be SAR 205000 which is clearly
lesser than the former project (Almoajel, 2016).

5CASE STUDY: RATIONING AVAILABLE CAPITAL
Conclusion
The comparison of both the projects is seen with net profit for the upgrading of the
operational facility is seen to be depicted with increase of 2% for 2018 to 2019 whereas The
net profit for the Five-story parking structure is seen to be depicted with aa decrease of 4%
for the same time period. Moreover, on deciding with the NPV the upgrading of the
operational facility is more feasible in nature. This is evident with NPV for Upgrading and
expanding of operating room including the addition of robotic surgical assisting devices such
as X-Ray Film processor table top, Ultrasound machines, Gastroscope and Colonoscope
taken into consideration with and amount of SAR 10817628.1. On the other hand, the
parking facility is seen to generate a lesser amount of NPV. Therefore upgrading and
expanding of operating room including the addition of robotic surgical assisting devices
needs to be taken into account for the final funding.

6CASE STUDY: RATIONING AVAILABLE CAPITAL
References
Afriyie-Darkwa, V. (2017). Performance Evaluation of the Management and Performance of
On-Street Parking Within the Central Business District of Sunyani (Doctoral
dissertation).
Almoajel, A. (2016). Medical Errors from Healthcare Professional’s Perspective at a Tertiary
Hospital, Riyadh, Saudi Arabia. Prensa Med Argent, 102(4), 3.
Arabi, Y. M., Phua, J., Koh, Y., Du, B., Faruq, M. O., Nishimura, M., ... & Al-Dorzi, H. M.
(2016). Structure, organization, and delivery of critical care in Asian ICUs. Critical
care medicine, 44(10), e940-e948.
Saleem, M. (2017). ALTERNATE TECHNIQUE FOR WIDENING ROADS NEAR
COMERICAL PLACES. Sarhad University International Journal of Basic and
Applied Sciences, 4(1), 90-96.

7CASE STUDY: RATIONING AVAILABLE CAPITAL
List of Appendix
Expansion of Operational Facility
X-Axis Label Sales Gross Margin Net Profit
Year 1 $3,765,000 $2,950,235 $814,765
Year 2 $6,500,000 $5,002,946 $1,497,054
Sales Profit Before tax Pretax Net Margin
Year 1 3,765,000 1,163,950 31%
Year 2 6,500,000 2,138,649 33%
0 0
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 00 00 0
Highlights
Sales Gross Margin Net Profit
Year 1 Year 2
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
28%
30%
32%
34%
Profit Before tax
Pretax Net Margin

8CASE STUDY: RATIONING AVAILABLE CAPITAL
(1) SALES FORECAST
Year 0 1 2
Projected Sales 3,765,000 6,500,000
(b) Cost of goods 2,023,000 3,575,000
(2) CASHFLOW FORECAST
Preop
Year 0 1 2
CASH INFLOWS
Cash from Sales 3,765,000 6,500,000
Directors loans 0 20,000 10,000
Capital Employed 0 80,000 80,000
Other cash inflows
TOTAL CASH INFLOW 0 3,865,000 6,590,000
CASH OUTFLOWS
Payments for materials 2,023,000 3,575,000
operating expenses ( ) 0
Premises (rent, rates) 0 36,000 42,000
Salaries 0 334,000 536,070
General expenses 0 4,600 4,876
Interest and bank charges payable 0 2,000 2,000
Lease payments 0 3,000 3,000
Corporation Tax 349,185 641,595
Market survey costs 0 3,100 1,750
Other preliminary expenses 0 5,200 5,330
capital expenditure
Plant and other capital expenditure 0 12,500 12,750
financing repayments
Loan repayments 10,000
TOTAL CASH OUTFLOWS 0 2,772,585 4,834,371
Cash flow summary
NET CASHFLOW FOR PERIOD 0 1,092,415 1,755,629
OPENING CASH BALANCE 0 0 1,092,415
CLOSING CASH BALANCE 0 1,092,415 2,848,044
(3) DEPRECIATION SCHEDULE
Year 0 1 2
Fixed Assets
Equipments 15000 13,500 12,000
Ambulances 32000 25,600 20,480
Utensils 12500 10,000 8,000
Total book values (i.e. net fixed assets) 0 49,100 40,480
Annual Depreciation
Furniture-10% straight line 1,500 1,500
Vehicles - 20% reducing balance 6,400 5,120
Plant & machinery-20% reducing balance 2,500 2,000
total annual depreciation 10,400 8,620
(4) PROFIT AND LOSS FORECAST
Preop
Year 0 1 2
Revenue 0 3,765,000 6,500,000
Cost of sales 0 2,023,000 3,575,000
Gross profit 0 1,742,000 2,925,000
Gross Margin 2,950,235 5,002,946
Expenses/overheads
Premises (rent, rates) 36,000 42,000
Wages and salaries 334,000 536,070
General expenses 4,600 4,876
Accountant Fees 150,000 150,000
Payroll Tax 6,500 7,475
Utilities 23,000 24,150
Sales and Marketing 10,500 10,815
Postage & Telephone 1,750 1,960
Repairs and Maintainance 3,500 3,675
Preliminary expenses 5,200 5,330
Lease Payments 3,000 3,000
Total expenses/overheads 578,050 786,351
Profit before tax 1,163,950 2,138,649
Tax @ 30% 349,185 641,595
Before tax net margin 31% 33%
Profit after tax 814,765 1,497,054
Transfer to reserves 1,163,950 2,138,649
Upgrading and expanding of operating room including the addition of robotic
surgical assisting devices

9CASE STUDY: RATIONING AVAILABLE CAPITAL
Start-up Expenses
Fixed Costs Particulars Amount ($)
Premises (RENT & RATES) $36,000
Salaries $334,000
Interest on loan 8% $2,000
Accountant Fees $150,000
Payroll Tax $6,500
Retainer contracts $23,000
Sales and Marketing $10,500
Postage & Telephone $1,750
Brouchers $3,500
Logo Designs $4,600
Market survey $3,100
Preliminary expenses $5,200
Lease payments $3,000
Total Fixed Costs $583,150
Average Monthly Costs
Rent $3,000
Lease payments $250
Interest on loan 3% $167
Postage & Telephone $146
Repairs and Maintainance $292
Salaries / Wages $27,833
Total Average Monthly Costs $31,688
x Number of Months: 12
Total Monthly Costs $380,250
Total Startup Expenses $963,400
Start-up Assets
Owner Funding
Owners Fund $80,000
Total Owner Funding $80,000
Loans
Bank Loan $20,000
Other
Total Loans $20,000
Total Start up Funds $100,000
Assets
Equipments $15,000
Ambulances $32,000
Utensils $12,500
Total Fixed Assets $59,500
Total Start-up Assets $159,500
Upgrading and expanding of operating room including the addition of robotic surgical assisting devices

10CASE STUDY: RATIONING AVAILABLE CAPITAL
Assets FY-1 FY-2
Current Assets
Cash $128,450 $45,000
Accounts receivable $3,765,000 $6,500,000
Total current assets $3,893,450 $6,545,000
Fixed (Long-Term) Assets
Ambulances $32,000 $12,000
Equipments $15,000 $20,480
Utensils $12,500 $8,000
(Less accumulated depreciation) $10,400 $8,620
Total fixed assets $49,100 $31,860
Total Assets $3,942,550 $6,576,860
Liabilities and Owner's Equity
Current Liabilities
Accounts payable $35,000 $25,000
Accrued Rent $36,000 $42,000
Bank Charges Payable $3,000 $3,000
Short-term loans $10,000 $10,000
Income taxes payable $349,185 $641,595
Deferred income Tax $2,917,765 $5,086,319
Accrued salaries and wages $334,000 $536,070
General Expenses $4,600 $4,876
Lease Payment $3,000 $3,000
Current portion of long-term debt $50,000 $45,000
Total current liabilities $3,742,550 $6,396,860
Long-Term Liabilities
Long-term debt $200,000 $190,000
Less: Loan Repayment $10,000
Total long-term liabilities $200,000 $180,000
Total Liabilities $3,942,550 $6,576,860
Owner's Equity
Owner's investment $80,000 $80,000
Net Profits $814,765 $1,497,054
Reserve and Surplus $1,163,950 $2,138,649
Total owner's equity $2,058,715 $3,715,703
Total Liabilities and Owner's Equity $6,001,265 $10,292,563
{42}
Common Financial Ratios Year 1 Year 2
Debt Ratio (Total Liabilities / Total Assets) 1.00 1.00
Current Ratio (Current Assets / Current Liabilities) 1.04 1.02
Working Capital (Current Assets - Current Liabilities) 150,900 148,140
Balance Sheet
Upgrading and expanding of operating room including the addition of robotic
surgical assisting devices

11CASE STUDY: RATIONING AVAILABLE CAPITAL
YEAR 1 YEAR 2
Doctors 84000 89880
Nurses 32000 34240
Occupational
therapists and
physiotherapists
28000 29960
Paramedics 23000 24610
TOTAL
PEOPLE
2 3
Total Payroll 334,000 536,070
PERSONNEL PLAN
Upgrading and expanding of operating room
including the addition of robotic surgical
Discount Rate 10%
Now 1 2
Initial Cost 2,023,000
Annual Profit/Loss 3,765,000 6,500,000
Estimated Residual Value 0 0
Total Cash Flows 0 3,765,000 6,500,000
Discounting Factor 0 0.90909091 0.8264463
Present Value of Cashflows 2023000 3422727.27 5371900.8
Net Present Value
Year
Upgrading and expanding of operating room including the addition
of robotic surgical assisting devices
10817628.1
Parking Facility
X-Axis Label Sales Gross Margin Net Profit
Year 1 $880,000 $845,280 $34,720
Year 2 $968,000 $952,121 $15,879
Sales Profit Before tax Pretax Net Margin
Year 1 880,000 49,600 6%
Year 2 968,000 22,684 2%