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Green Valley Medical Center Case Solution & Answer

Green Valley Medical Center Case Solution

Return on investment:

It is a very popular metric because of its flexibility and simplicity. If the return of the investment is in positive and higher, then this means that investor has to invest in that project. The formula of the calculating ROI is outflow divided by initial investment. According to this case, the return on investment is calculated of both PET proposal and the Laundry proposal. While calculating the ROI of PET proposal we determine, the two ROI of PET, on the basis of the fully reimbursed and not reimbursed. The initial investment of the PET comprised of cyclotron and two cameras, and facility renovation. The total initial investment given in this case was $5,800,000; the outflow of the PET from full reimbursed is $1,630,000; the return of the full reimburse is 28.10%, it is very risky because it is calculated with full reimburse and the return on the investment of PET without reimbursed is 4.66%. On the other hand, initial investment of the laundry proposal is comprised on the cost of CBW, three dryers, press and additional cost of installation. The total initial investment of laundry proposal is 1,025,000 was given in the case the total annual saving of this proposal was 247000 was also given in the case the ROI of the Laundry is 17.43%

     
ROI of PET fully reimbursed 28% high risk
ROI Of PET without reimbursed 5% low risk
ROI of Laundry 17% low risk
     

 As the ROI of PET fully reimbursed is very risky, we can eliminate this to compare the ROI of PET and laundry. On the basis of the return on investment, the ROI of laundry is higher than the ROI of the PET. The hospital has to invest in the laundry proposal to get a higher return than the PET.

Payback period:

 Payback period in capital budgeting refers the time period required to cover the initial investment. It is a simple approach to calculate and it provides a quantitative mean for evaluating capital decisions, but the disadvantage of this approach is that it does not consider the time value of money. The formula of calculating payback period is cost divided by annual cash inflow.

Payback Period of PET 7 years
Payback Period of Laundry 4 years

The payback period is usually expressed in years, longer payback period are not desirable for the investment. According to this case, the payback period of PET is 7 years, this means that the hospital may require  7 years to recover the initial cost on the PET, while the Payback period of the laundry proposal is 4 years, that is, hospital will require 4 years to recover the initial investment. Here we can see that payback period of the laundry proposal is lower than the PET proposal. Therefore, the hospital has to invest in laundry proposal. The reason for this that the payback period is shorter and the hospital will be able to get all of their initial investment in 4 years.

Net present value:

For calculating the net present value of both the proposals, we have to find out weighted average cost of capital

For the calculation of weighted average cost of capital, the weight ages of equity, as well as debt are calculated from the balance sheet of the hospital. The required rate of the equity was also given in the case, which is 10%. In order to calculate the rate of the debt,  ………………..

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