Investment Decisions: Capital Budgeting for Sooner Clinics

This case study delves into the capital budgeting and investment decisions facing Sooner Clinics, a subsidiary of Sooner Health System. It examines various financial aspects, including activity-based costing, revenue analysis, and balance sheet assessment. The analysis includes calculations of present value of cash flows, EBIT, and the overall valuation of the organization for potential acquisition. It considers different operational alternatives, cost drivers, and market data from comparable acquisitions. Using a 15% interest rate, the present value of net cash inflow is calculated and compared to the annual cash outflow. The study also estimates the organization's value based on future growth and cost of capital. The recommendation is for UHSC to acquire Sooner Clinics, given that the calculated value significantly exceeds the acquisition cost. This study provides a comprehensive financial overview and strategic recommendation based on thorough analysis and calculations.

Running head: CAPITAL BUDGETING AND INVESTMENT DECISIONS
Capital Budgeting and Investment Decisions
Name of the Student:
Name of the University:
Authors Note:

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
Capital investment decision making process:
In order to take capital investment decisions an organization requires information about
the expected return from investment, the number of period up-to which an organization expects
to earn return from any investment option, the residual value of investment and the discounting
rate to be used to calculate net present value of different investment options (Carvalho, Meier &
Wang, 2016).
If the net present value of a project or investment option is positive then an organization will be
willing to make investment in a capital project. Opposite will be the case if the net present value
of the project is negative.
In order to assess the desirability of a project from the perspective of investors it is important to
use appropriate investment appraisal technique to find out the expected outcome of such
investment option. The investment appraisal techniques include use of internal rate of return
method, use accounting return method, net present value method and others. However, net
present value method (NPV) is the most appropriate and suitable method as it provides specific
amount after discounting the future cash flows (Shahid, Ahmad & Badar, 2017).
The importance of taking into consideration the time value analysis is the core idea behind use of
net present value method. In NPV, an appropriate rate of discount is used, generally the cost of
capital, to discount the future cash flows in relation to an capital budgeting decision to ascertain
the net present value of such capital budgeting scenario. The present value of cash flows is
reduced by the present value of initial outlays to calculate the net present value of a project. The
fact that the time value of money is an important consideration and often ignored in capital
budgeting decision is not a correct method to determine the actual outcome of an investment

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
option. Thus, it is important to use an appropriate rate of discount to discount the future cash
flows from an investment option to correctly assess the implications of investing in different
investment vehicles (Baum & Crosby, 2014).
Sooner Clinics:
In case of Sooner Clinics the appropriate calculations as provided below need to be assessed first
before taking important operating and financial decisions in relation to the organization. As per
the facts of the case the following tables have been calculated (Gotze, Northcott & Schuster,
2016).
Alternative 1:
Activity Cost Driver Volume Cost per
Unit
Total costs
Appointment scheduling Receptionist
time
3 min $
0.20
$
0.60
Patient check-in Receptionist
time
5 min $
0.20
$
1.00
Ultrasound testing Technician
time
30 min $
0.40
$
12.00
Physician time 1.5 min $
3.00
$
4.50

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
Supplies per
procedure
$
9.00
$
9.00
Patient check-out Receptionist
time
5 min $
0.20
1
Film processing Technician
time
10 min $
0.40
$
4.00
Film reading Contract terms per
procedure
$
40.00
$
40.00
Billing and collection Overhead
costs
per
procedure
$
6.80
$
6.80
General administration Overhead
costs
per
procedure
$
1.25
$
1.25
Transportation, setup, and
breakdown
Technician
time
18 min $
0.50
$
80.15
Alternative II:
Activity Cost Driver Volume Cost per Total costs

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
Unit
Appointment scheduling Receptionist
time
3 min $
0.20
$
0.60
Patient check-in Receptionist
time
5 min $
0.20
$
1.00
Ultrasound testing Technician
time
30 min $
0.40
$
12.00
Physician time 1.5 min $
3.00
$
4.50
Supplies per
procedure
$
9.00
$
9.00
Patient check-out Receptionist
time
5 min $
0.20
1
Film processing Technician
time
10 min $
0.40
$
4.00
Film reading Contract terms per
procedure
$
40.00
$
40.00
Billing and collection Overhead
costs
per
procedure
$
6.80
$
6.80
General administration Overhead per $ $

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
costs procedure 1.25 1.25
Transportation, setup, and
breakdown
Technician
time
18 min $
0.50
$
9.00
$
89.15
Exhibit 4.5 Wilde and
Sullivan: Selected Data
for Recent Acquisitions
of Primary Care
Practices in the Sooner
Region
Sooner
Clinic
Alvarez
Family
Health
Johnson
Walk-In
Centre
South Side
Clinic
Wilson
Internal
Medicine
Patient visits $5,600 $34,000 $40,000 $170,000
Net patient revenue $380,000 $2,400,000 $2,700,000 $13,000,00
0
EBIT $159,000 $520,000 $600,000 $2,000,000

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
Depreciation $20,000 $80,000 $90,000 $800,000
Full-time physicians 1 2 4 20
Part-time physicians 0 6 3 4
Estimated Years 1.5
revenue
growth rate 5% 4% 3% 2%
Price $800,000 $6,000,000 $7,000,000 $44,000,00
0
EBIT: earnings before interest and
taxes
Physician FTEs $5.17 $38.06 $43.91 $146.37
Net patient revenue per
FTE
$18.54 $117.10 $131.73 $634.27
Patient visits per FTE per
day
$7.76 $25.37 $29.27 $97.58
Price / physician FTE $18.54 $117.10 $131.73 $634.27
Price / net patient revenue $2.11 $2.50 $2.59 $3.38

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
Price / EBITDA $5.03 $11.54 $11.67 22 (Lakew
& Rao,
2015)
Assets
Cash and cash equivalents $73,475
Marketable securities $42,399
Accounts receivable $85,702
Medical and administrative
supplies
$9,890
Current Assets $211,466
Net plant and equipment $1,689,524
Investment properties $450,461
Total Assets $2,351,451
Liabilities and Owner's Equity
Notes payable $352,718
Owner's equity $1,998,733
Total liabilities and equity $2,351,451

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
Particulars Amount ($)
Net revenues $1,491,791
Operating expenses
Fixed $719,997
Variable $349,079
Total operating
expenses
$1,069,076
EBIT $422,715
Interest expense $25,575
EBT $397,140
Taxes $119,142
Net profit $277,998
Using a 15% interest rate the calculation of present value of net inflow of cash is calculated in
the table below:
Particulars Amount ($)

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
Net revenues $1,491,791
Operating expenses
Fixed $719,997
Variable $349,079
Total operating expenses $1,069,076
EBIT $422,715
Interest expense $25,575
EBT $397,140
Taxes 119,142.00
Net profit 277,998.00
Add: Depreciation $11,070
$289,068
Less: Capital expenditure $15,000
Net inflow $274,068
Present value factor @15% $0.87
Present value of outflow $238,320 (Li &

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
Trutnevyte,
2017)
As can be seen from the table above that the present value of expected cash inflow $238,320 is
significantly high than the amount of annual cash outflow. Accordingly, the organization should
use all calculations to see whether the investment option is suitable for the organization (Harris,
2017).
As per the information provided about the EBIT of 4 different departments of the sector the total
EBIT of Sooner Clinics will be $18,480,000. Assuming that an average growth of 3.5% will be
achieved by the organization in the future and a cost of capital of 6% the value of the
organization for the purpose of acquisition can be calculated as following:
(18,480,000/ 6% -3.5%) = $739,200,000 (Hicks, 2017).
Thus, the prospective buyer of Sooner Clinic shall conduct all necessary analysis of the operating
performance and position of the clinic to determine whether the organization should be acquired
by the prospective buyer or not. As can be seen that as per the value calculated in the above, i.e.
$739,200,000 Heidi should buy the clinic as the value of the clinic is significantly higher than the
amount to be paid by Heidi to buy the clinic (Frydman & Camerer, 2016).
Recommendation:
Thus, taking into consideration the discussion above it is clear that UHSC should make the
accusation as the price is to be paid by later to acquire Sooner clinic is significantly low than the
value calculated as per the growth model. Hence, UHSC should acquire Sooner clinic.

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
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