A capital Budgeting Analysis Harvard Case Solution & Analysis

A capital Budgeting Analysis Case Study Solution

The case introduces St Joseph hospital, established in the year 1964.With the sole purpose of providing high quality health care services, to the patients suffering from rare heart diseases. The hospital was located in Santa Monica, CA. However, it was illustrated in the case that, it’s CEO Terrence McLagan was considering to invest $6 million, to acquire an existing clinic and rename it as Walden Clinic. The Walden Clinic project needed to be evaluated, whether it could potential provide the Hospital any benefit in the future or not. Therefore, discounted cash flow valuation method was used, to estimate the Net present value of the project, along with its terminal value and enterprise value. Which in turn, would enable Terrence to decide whether to acquire the Clinic or not.

Capacity Constraints and Model

It can be evaluated from the data provided in the case that, the influx of patient in year-1 would be on average 76,000 out of which 45% would be Adults and 55% would be children. Furthermore, in the subsequent year it was given that, 80,000 patient would visit on average, with a 3% annual growth rate. Therefore, as illustrated in the excel exhibit that if the Average influx of patients in 80,000 on average with a 3% growth rate.Then the hospital would reach and exceed its capacity, within four year of acquire Walden Clinic.

Base Case Analysis

It can be evaluated from the base cash analysis, calculated under the assumption that, uninsured patient responsible for decreasing the revenues by 45%, the new clinic would not incur this loss. Hence, it can be determined that, the cash flows generated under each year of operating could be calculated.By estimating the total cost of all three health care services provided to adults and children alike, and subtracting this amount along with other cost associated with operating the clinic, by the revenues generated for providing the same three services to the patients. Which would enable us to determine the annual cash flows, as illustrated in the excel exhibit. Similarly, the NPV value could be calculated, by adding all the cash flows generated over the six year period and subtracting them, by the amount of initial investment at $6 million. Which in turn, would enable us to estimate the NPV at 12.12% WACC,amounting to a positive $12,936,825. Which meant that, project should be accepted, as it could provide benefit to the hospital in the future.

A capital Budgeting Analysis Harvard Case Solution & Analysis

Sensitivity Analysis

The most important drivers for the hospital are illustrated in the Exhibit below, along with their Sensitivity margins and breakeven points. In which, it can be evaluated that, if the Total all three Health care services revenues generated from adults decreases by 35%, then the NPV would become Zero. Whereas, if the same revenues generate from Children would decrease by 29%, the NPV of the project would become zero. Similarly, if cost of Simple procedure increases by 2% the NPV of the project would become zero. Whereas, if the cost of in-house test and routine checkups increases by 2% and 3% respectively, then the NPV of the Project under both cases would become zero.

Simulation analysis

Under the simulation analysis conducted in excel, using 5000 iteration to project the NPV of Walden Clinic. It can be determined that, the project would be profitable, as the NPV generated under each Iteration is positive =, which could enable us to evaluate the future potential profitability of the Walden Clinic project.

Investment Decision

After critically analyzing the investment decision, regarding the potential acquisition of Walden Clinics. It can be determined that, Terrence should accept the project, as it could potential benefit to the hospital, attributed to its positive NPV generated amount to $12,936,825. Which meant that, after the end of the project life the hospital could stand to earn up to the aforementioned amount. Therefore, it is recommended to Terrence that, he should accept the project, while maintaining the cost associated with the project at a lower level. Which could provide significant amount of revenues in the future.........................

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