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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Kildare Medical Center, a for-profit hospital, has three investment opportunities: (1) adding a wing for in-patient treatment of substance abuse, (2) adding a pathology laboratory, and (3) expanding the outpatient surgery wing. The initial investments and the net present value for the three alternatives are as follows:

Chapter 12, Problem 47P, Kildare Medical Center, a for-profit hospital, has three investment opportunities: (1) adding a wing

Although the hospital would like to invest in all three alternatives, only $1.5 million available.

Required:

  1. 1. Rank the projects on the basis of NPV, and allocate the funds in order of this ranking. What project or projects were selected? What is the total NPV realized by the medical center using this approach?
  2. 2. CONCEPTUAL CONNECTION Assume that the size of the lot on which the hospital is located makes the substance abuse wing and the outpatient surgery wing mutually exclusive. With unlimited capital, which of those two projects would be chosen? With limited capital and the three projects being considered, which projects would be chosen?
  3. 3. CONCEPTUAL CONNECTION Form a group with two to four other students, and discuss qualitative considerations that should be considered in capital budgeting evaluations. Identify three such considerations.

1.

To determine

Position the projects on the basis of NPV and assign the funds in accordance with the position. Identify the project(s) selected. Also find out the total NPV realized by medical center by this approach.

Explanation

Net Present Value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

Rank the project and allocate the funds:

RankProjectInvestment($)Allocation($)

2.

To determine

State the project to be selected if the capital is unlimited and substance abuse wing project and outpatient surgery wing are mutually exclusive. State the projects to be selected with limited capital and taking into consideration all three projects.

3.

To determine

State three quantitative considerations that should be considered in capital budgeting.

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