The board of directors of Trinity Hospital is working on a five-year strategic plan for the facility. One of the strategic goals is to build a new $1million cancer research wing in five years. The group is concerned that current economic conditions might reduce revenues over the next five years and they are uncertain about the fate of the construction project. You are part of team tasked with conducting a capital budgeting analysis. The entire component of the course will involve different aspects of the capital budgeting analysis. You are to perform the calculations and interpret the findings in your papers.
Identify the relevant assets as well as labor and non-labor costs categories that you will want to include in the analysis. Submit the list of categories and an explanation for why you selected these items in a WORD document.
Construct an EXCEL spreadsheet using these categorical labels
When developing a capital budget, there are a couple of different methods that can be used. One method involves finding the NPV or net present value of the project. This is the current value of the project based upon a forecasted period. A company, such as Trinity Hospital, should only move forward if the NPV is zero or greater as this means the organization will realize a full return on their investment.
In order to find the NPV the income and expenditure of Trinity Hospital will have to be budgeted for the first year and forecasted for a set period, say in this instance for four additional years. This means the following categories must be determined:
- Revenues- This is the amount of money coming into Trinity Hospital, which will be important for offsetting the cost of the expansion.
- Fundraising- This is monies or cash collected by Trinity Hospital without providing services, thus eliminating or drastically reducing the cost of capital for the funding.
- Grants- This is cash provided to the organization to achieve a specific purpose. This money comes with requirements that must be met, but can go to offset the cost of the expansion and are considered income for the hospital.
- Cost of Goods Sold- This is the cost incurred by Trinity Hospital to provide service to patients. This must be taken into consideration when making any budget.
- Operating Expenses- Operating expenses are the costs required to run the hospital such as cost of goods sold, wages, benefits, marketing, etc. These costs are unavoidable and required in order for Trinity Hospital to be able to operate, and therefore must be included.
- Depreciation- This devalues assets as they become devalued over time and through use. This is important to include in the budget as it accounts for reduction in value of the capital expenditure.
- Capital Expenditure- This is the total amount of money being spent on the new Cancer research wing of Trinity Hospital. This number is essential in creating the capital budget as it is the cost of the project that is being budgeted for.
- Cash Flow- Cash flow is the amount of cash on hand after expenses have been taken from revenues. This number is important as it shows the amount of profit generated by the organization.
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