Choice Between Rehabilitation Centre and Neonatal Wing

Choice between Rehabilitation Centre and Neonatal Wing

Abstract

The present case relates to a situation in which a person has been appointed in the financial department of a major non profit hospital. The duty of the appointed person is to make sure that the day to day accounting activities such as budgeting, management of the ledger and training of the subordinates is done in an efficient manner in the organization. The organization is looking forward to invest some money into a new project. The resources available with the organization are scarce and it has to decide between two projects. The first option available with the organization is opening up a Rehabilitation Centre and the second option is Neonatal Wing. The paper shall discuss about the two options on the basis of Net Present Value, profitability index and return on investment and then decide about the best option for the non profit hospital.

Introduction

Net present value, return on investment and the profitability index are three particular methods which are used by the organizations around the world for the purpose of determining the project which should be selected by the organization in the case of scarce resources. These methods help the organization to utilize its resources in a proper and efficient manner without any kind of problem (Berry, 2005).In the present case the non-profit hospital has to decide between the projects of rehabilitation centre and neonatal wing. The paper shall discuss about these two projects in detail.

Net Present Value

The method of net present value is a very important method which is used by the organizations for the purpose of taking the decisions regarding the investment to be made in the project. For this analysis, the net present value of the projects is determined and then the project which has higher net present value is selected by the organization.

In this case, the organization has to determine the future cash flows and then calculate the present value of the future cash flows by discounting the same with the discounting factor. The purchase price or the initial cost of the investment is known to the organization at all the times. The net present value of a project is determined by deducting the present value of the cash inflow from the present value of the cash outflow of the organization.

In the present situation the organization has got two projects and the decision regarding the project is to be taken on the basis of the net present value method. For the rehabilitation centre, the initial cost shall be $1, 00,000 which shall be the cash outflow. The hospital shall be able to have $30, 000 as the cash outflow for the next 5 years. On discounting the cash outflow with the discounting factor, the net present value of the project of rehabilitation centre comes out to be around $1, 13, 760 - $1, 00, 000 = $13, 760.

The other project which is of a neonatal wing would cost the organization around $90, 000 as the initial cost but the annual cash outflows in this project shall be $25, 000. On discounting the cash outflows of the project of neonatal wing, it is found out that the net present value is $94,800 - $90, 000 = $4800. In this way, one can say that the organization should invest the money in the rehabilitation centre as it is providing more net present value to the organization in comparison to the other project.

Return on Investment

Return on investment is another method which is used for