Question

An independent orthopedic clinic is considering expanding by opening a small surgery center instead of renting space in a local hospital. They ask their financial department (you) for methods of calculating whether or not they should consider the project. They are unfamiliar with the methods and just want an understanding of how they work.

Choose the capital investment decision method (Payback, Net Present Value, or Internal Rate of Return) that you think would work the best for this situation. How would you describe the method so that the doctors can understand the way it works? What outcome would they need to achieve in order to go ahead with the project?

It was then decided that a new imaging machine needed to be purchased as part of the project. What financial and other factors do you think they need to consider when making a decision?

Review the posts made by your classmates and reply to at least one that recommended a different method of calculating returns or choosing to purchase the imaging machine. What are the strengths of the method they chose? What are its weaknesses? After reading their rationale, would you change your approach?

Answer 1

It is suggested to use the payback method, What the payback method will do is allow us to look at how long we will pay the investment back. The outcome, we can identify how long it will take to pay back on what it would cost to invest in the new space.

The company will have to determine if funds are available for new imaging equipment.

First, the financial need to be in place to put the latest equipment on the capital list for purchase. The request would need to go to a capital committee for review and either acceptance or denial to identify if new is required or if used equipment could be purchased at a lower rate, thus saving the company money in the long-term (Rasmussen College, 2019).

When making a large capital investment such as an expansion, a company must determine if an investment is worthwhile, the long-term benefits, and how to finance the investment.

Things to consider are the financial return on investment,

1. Future funding ability
2. Non-financial benefits.

Net Present Value (NPV) is the investment decision method that calculates the difference between the initial amount of the investment and future cash inflows brought in by the investment, adjusted for the cost of capital.

IRR

Cash flows are adjusted or discounted to account for the cost of capital, which is the rate of return acquired to undertake a project. Estimating cash flow and determining the discount rate can be difficult using the NPV method, but it accounts for all the cash flows in the project and provides the answer in dollars, which the Payback method does not. The outcome needed to go ahead with the project using the NPV method is:

• if the NPV>0, go forward with the project
• if the NPV<0, do NOT go forward with the project
• if the NPV=0, then the organization can either go forward or not go forward with the project

A company’s assets and debt are important factors to consider when acquiring assets so they stay in balance. In addition, return on investment and non-financial benefits should be considered in making a decision about the new imaging machine. Some non-financial benefits are location in the community, taking business away from competitors, and faster access for patient results. The financial return on investment is also important because machinery does depreciate and require maintenance, so knowing when they’ll break even on cost of investment vs. the expected life of the imaging machine is important.

Source :

Used some of internet pages to conclude the answer