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Capital Budgeting SLP - Essay Example
Assessing investments on the basis of past performance to inform decisions may lead to project failure and bankruptcy. Various changes impact on the future performance of firms including growth in assets and…
The financial health of the hospital can be evaluated by examining its liquidity, profitability and leverage. The three measures are internal financial management issues. In particular, liquidity refers to the ability of the company to meet its cash obligations or pay its expenses, and is related to the availability of assets to cover liabilities (Flex Monitoring Team, 2005). Profitability refers to the ability of the hospital to generate financial returns sufficient to replace assets and compensate investors (Flex Monitoring Team, 2005). The measures for profitability focus on calculating financial returns on investments. On the other hand, leverage is the percentage of capital from investors as compared with creditors.
Current liabilities refer to the monies owed by the hospital that will fall due within one year of operation while current assets refers to the sum of cash, receivable accounts, inventories or other items that the hospital can convert into cash in the short-term (Gill and Chatton, 2001). Current ratio ascertains the company’s liquidity or the working capital position. It is a robust measure and gives insights on whether the company used its short-term assets to pay its current liabilities. The calculated current ratio is 2.3 indicating the capital the business uses to run its operations. Furthermore, the hospital has equity of $2,000,000. Equity is the amount that remains if all liabilities were paid off and all assets sold at book value (Vance, 2003). The hospital is therefore in good financial health.
Based on the calculations, the project should be rejected. The NPV is used to analyze cash inflows for the project taking into consideration the investment returns and inflation. The investment would present a negative NPV (-390200) and IRR (-0.722) indicating that the project is risky in the given time horizon. The hospital should therefore evaluate its risk ...