MBA FPX 5014 Assessment 2 1 Evaluation of Capital Projects

MBA FPX 5014 Assessment 2 1 Evaluation of Capital Projects. Introduction ABC Healthcare Corporation owns over 25,000 hospitals, ambulatory surgical centers, urgent care centers and outpatient clinics across the United States. The company is dedicated to providing the upmost quality care specializing in trauma, women’s health and reconstructive surgery. ABC Healthcare employs over 175,000 healthcare professionals and supportive staff in over 32 states including Alaska and Hawaii. Besides providing specialized care, the company focuses on procuring the latest state-of-the-art medical technologies and innovations. In addition, ABC Healthcare has won numerous medical grants and accolades during its 25 years of operation. Its founder and current president Maria Gomez seeks to increase shareholder value in an effort to attract more investors and eventually expand the corporation. This report will use capital budgeting tools to compute future project cash flows that will be allocated to 1 of the 3 projects ABC Healthcare Corporation is considering, in order to increase shareholder value and add value to the company. Project A Summary: Major Equipment Purchase The major equipment purchase will cost $10 million however, it is projected to reduce cost of sales by 5% per year for 8 years. The equipment will be depreciated at a modified accelerated cost recovery system (MACRS) 7-year schedule. The modified accelerated cost recovery system allows a business to recover the initial costs of certain assets that deteriorate over time. This is beneficial since faster acceleration allows individuals and businesses to deduct greater amounts during the first few years of an asset's life, and relatively less later (Kagan & Uradu 2020). The equipment is projected to be sold for salvage value estimated to be $500,000 at the end of year 8, with a required rate of return set at 8%. However, ABC Healthcare Corporation must account for the corporate tax rate of 25%. Projected annual sales for Year 1 are $20 million and should stay the same per year for 8 years. Earlier cost of sales before this project was 60% an estimated $12,000,000. The net present value (NPV) of this project is 29,183,703.20, the internal rate of return (IRR) is 67.55%, and the profitability index is 3.92% as seen in Figure 1 below. Figure 1. Project A: Major Equipment Purchase spreadsheet This study source was downloaded by from CourseH on :41:30 GMT -06:00 Evaluation of Capital Projects Project B Summary: Expansion into 3 additional states The start-up costs for the expansion is projected to be $7 million and will need an upfront investment in net working capital of $1 million. The working capital amount is expected to be recuperated at the end of year 5. The expansion into three additional states is projected to increase sales/revenues and cost of sales by 10% each year for the next five years. Cost of sales also known as cost of goods sold (COGS) refers to the direct cost of creating, producing, manufacturing goods sold (Bragg, 2021). It also includes materials and labor. The annual sales for the previous year were $20 million, influencing the projected future sales. A 25% corporate tax rate will need to be considered when performing budget calculations. The rate of return for this project is 12%, due to this being a risky investment. While the net present value (NPV) of this project is 16,358,949.80, the internal rate of return (IRR) is 78.49%, and the profitability index is 3.04% as seen in Figure 2