Question

The Catholic Healthcare West case describes traditional criteria for corporate capital investment decisions affecting a portfolio of multiple SBUs-- the economic performance of each SBU and the attractiveness of each geographic market. The conglomerate also takes into consideration the charitable activities of each SBU and the economic and health-related needs of the communities where it is located. Describe an objective, preferably quantitative methodology for incorporating all of these factors into capital investment decisions. This procedure should be able to prioritize the capital requests from the SBUs and determine the amount to be invested.

Answer 1

In any investment, the primary aim of the company to generate profits / Income and the rate of return is more than the cost of capital which is invested in the business.

There could be many operating Segments of a company as per the "IFRS 8: Operating Segments" based on geographical units of operation. Choice of the geographical segment can be based on various factors like:

1. Tax Haven Countries: Countries like Ireland have no tax on gain and companies like Apple park their profits in Ireland to evade 35% tax in the US.

2. Ease of doing business: Many countries don't allow repatriation of profits to its parent company outside its jurisdictions which will hamper the investment of the parent company in that country.

3. Market Opportunity: The Market study is the main constituent wherein the evaluation of whether market exists or not for a particular product in that country and how much the buyer is willing to pay for that product.

In the view of capital budgeting, the company needs to compute the amount of initial investment required to start a business in a geographical area and also take into account the annual recurring expenses. The recurring expenses shall include all day to day administrative and operating expenses. Also, all the expenses that are required to keep the company going need to be taken into consideration.

Furthermore, financial forecasting of the project needs to be done wherein the annual cash flows are computed for a stipulated period of time. If the NPV of the project is profit then the company should invest in that geographical area otherwise not.