Question

As a leader of your hospital you have been presented with three projects for consideration, they each have approximately the same capital expenditure request, and you have the capital resources for only one of these projects.

              1.           New primary Care office              $1,100,000 request       NPV 12%

              2.           New DaVinci Robot                       $1,300,000 request      NPV 11%

              3.           Remodel of Med/Surg Beds        $1,200,000 request       NPV 5%

Which project do you approve? Why? What other factors, other than finance should you use in this decision-making process? Why are they critical in the decision?.

Answer 1

1) I will approve NEW PRIMARY CARE OFFICE because on less investment our net present value is more.

These issues include focusing on cash flows, factoring in inflation, assessing qualitative factors, and ethical considerations

The classification of investment projects
a) By project size

Small projects may be approved by departmental managers. More careful analysis and Board of Directors' approval is needed for large projects of, say, half a million dollars or more.

b) By type of benefit to the firm

· an increase in cash flow
· a decrease in risk
· an indirect benefit (showers for workers, etc).
c) By degree of dependence

· mutually exclusive projects (can execute project A or B, but not both)
· complementary projects: taking project A increases the cash flow of project B.
· substitute projects: taking project A decreases the cash flow of project B.
d) By degree of statistical dependence

· Positive dependence
· Negative dependence
· Statistical independence.