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1 Evaluation of Capital Projects student institution MBA-FPX5014 Instructor 5/6/23

2 Evaluation of Capital Projects Executive Summary Under President Maria Gomez's leadership, ABC Healthcare Corporation operates a diverse portfolio of medical facilities encompassing ambulatory surgical centers, hospitals, urgent care centers, and outpatient clinics. Presently, the corporation is engaged in the evaluation of three separate capital projects aimed at bolstering shareholder value. Through the strategic application of capital budgeting tools, a comprehensive financial assessment is underway to discern the optimal project for shareholders. Key metrics such as investment costs, net present value, internal rate of return, payback period, and profitability index are scrutinized to identify the most advantageous undertaking. Upon analysis, it is determined that investing in Project C is the most lucrative approach for maximizing shareholder value.

3 Company Background ABC Healthcare Corporation operates various healthcare facilities, including ambulatory surgical centers, hospitals, urgent care centers, and outpatient clinics. The company is considering three distinct investment opportunities: acquiring new major equipment, expanding into three additional states, and launching a significant marketing and advertising campaign. The corporation must identify which projects will benefit its shareholders most. Given that each project has unique costs and durations, various budgeting tools will be utilized to evaluate their profitability comparatively. Capital budgeting entails the development of a financial strategy for long-term initiatives or business ventures, such as acquiring new properties or equipment, which will be funded by external revenue sources such as other departments (Ross et al., 2022). This process aids companies in assessing the risks and expected returns associated with a project. Furthermore, capital budgeting is an ongoing process that involves regular reassessment to accommodate changes in cash outflows, prevent project delays, and manage additional expenses (Booth et al., 2020). In scenarios where multiple investment options exist, leadership must carefully compare the risks and returns of each alternative to determine their profitability before deciding on which project to pursue. Capital Budgeting Capital budgeting is critical for companies aiming to select projects delivering optimal shareholder value. This involves thoroughly analyzing and evaluating potential investment opportunities to discern which projects will yield the highest return on investment and best serve the organization's shareholders (Ross et al., 2022). Companies can make informed decisions

4 about allocating their financial resources by considering upfront costs, potential returns, risks, and expected cash flows over time. Various metrics, including Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Profitability Index (PI), are employed in capital budgeting to compare the expected returns of different projects. These metrics enable companies to identify projects offering the highest value for shareholders while mitigating risks. Choosing the wrong project can have significant financial implications and hinder a company's ability to generate profits and sustain long-term growth, underscoring the importance of capital budgeting in informed investment decision-making (Mayo, 2018). Therefore, it is essential that companies thoroughly assess all possible metrics before making the final decision on which project to invest in. Capital budgeting is crucial for companies when trying to make an investment decision. Companies may utilize multiple capital budgeting techniques to comprehensively understand a project's financial impact (Booth et al., 2020). For instance, ABC Healthcare Corporation is evaluating the profitability of three projects by calculating NPV, IRR, Payback Period, and PI. While these tools provide valuable insights into a project's potential returns, it is essential to acknowledge their limitations, such as heavy reliance on projected future cash flows and failure to account for certain factors like the time value of money. Project A: Major Equipment Choices ABC Healthcare is contemplating the acquisition of new major equipment, anticipating a reduction in annual sales costs by 5% over eight years. The project, estimated at $10 million, will undergo depreciation utilizing the Modified Accelerated Cost Recovery System (MACRS) 7- year schedule, which facilitates the recovery of equipment costs through annual deductions. Over the equipment's lifespan, depreciation accelerates initially before tapering off in subsequent

5 years. At the end of the eighth year, the equipment can be sold for salvage at $500,000. With an 8% required rate of return and projected annual sales of $20 million throughout the project, ABC Healthcare anticipates reducing its cost of sales from 60% to 55%, resulting in a significant financial impact. Considering a marginal corporate tax rate of 25%, the project promises substantial benefits. Analysis reveals a positive Net Present Value (NPV) of $44,262,269, affirming the project's profitability. Despite an impressive Internal Rate of Return (IRR) of 79.79%, indicating solid returns compared to alternative projects, the extended 8-year duration suggests a steadier profit trajectory. The Payback Period for the initial equipment investment spans just over 15 months, signaling rapid repayment within 1.36 years. Furthermore, a Profitability Index (PI) of 5.43 underscores the investment's strength, with a value exceeding one indicating robust potential returns . Project B: 3 State Expansion

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