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Calculations: Analytic Methods for Financial Decision Making

Determining how to make a capital investment decision using financial techniques is an essential aspect of long-term financial decision making.

To prepare for the Calculations, review the sections of Chapter 7 (“The Investment Decision”) from your Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications textbook that explain how to analyze capital investment decisions using financial techniques. (The pertinent section of Chapter 7 to review for each type of Calculation is identified in the below list of Calculations.) Then, read scenario #15 (Kaiser Oakland Practice) on page 329, which contains the information that you will use to populate and perform the Calculations.

Complete the following Calculations and submit your completed Calculations in an Excel spreadsheet with three tabs—one tab for each of the following Calculations and with that particular tab reflecting only the result of that particular Calculation.

1. Determine the payback for both projects.

Note: For detailed information on how to perform this type of Calculation, review the section “Payback Method” and Exhibit 7-2 “Cash flows for two alternative project investments” and Exhibit 7-3 “Calculation of payback year for two alternative investments” on pages 308 and 309, respectively, of the Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications textbook.

2. Determine the IRR for both projects.

Note: For detailed information on how to perform this type of Calculation, review the section “Unequal cash flows” and Exhibit 7-8 “Using Excel to Calculate the IRR…that yields unequal operating cash flows…” (This can also be used for equal cash flows) on page 318-319 of the Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications textbook.

3. Determine the NPV at a cost of capital of 12 percent for both projects. Which project should be chosen? Explain.

Note: For detailed information on how to perform this type of Calculation, review the section “Using spreadsheets to calculate NPV” and Exhibit 7-6 “Using Excel to calculate the net present value of unequal annual cash flows” (This can also be used for equal annual cash flows) on page 316 of the Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications textbook.