Course Code FM007 Capital Project Case Study

Part 1: Analyzing organization financial data

Calculate the 5-year net sales, operating expenses, operating income, and net income of Jiranna Healthcare

Jiranna Healthcare Income Statement (in thousands)

Particulars

 

 

 

 

 

Gross patient services revenues (non-GAAP)

2014

2015

2016

2017

2018

Less deductions from revenues (non-GAAP)

 $  12,823.00

 $  13,630.00

 $  14,437.00

 $  15,244.00

 $  16,051.00

Net patient service revenues

 $-1,829.00

 $-2,054.00

 $-2,279.00

 $-2,504.00

 $-2,729.00

Other operating revenues

 $  10,994.00

 $  11,576.00

 $  12,158.00

 $  12,740.00

 $  13,322.00

Total operating revenues

 $            1,007.40

 $            1,108.00

 $            1,208.60

 $            1,309.20

 $            1,409.80

 

 $  12,001.40

 $  12,684.00

 $  13,366.60

 $  14,049.20

 $  14,731.80

Operating expenses

 

 

 

 

 

Salaries and wages

 

 

 

 

 

Supplies

 $            6,936.40

 $            7,246.20

 $            7,556.00

 $            7,865.80

 $            8,175.60

Utilities

 $         925.80

 $         946.20

 $         966.60

 $         987.00

 $            1,007.40

Insurance

 $         630.70

 $         645.00

 $         659.30

 $         673.60

 $         687.90

Depreciation

 $         70.60

 $         76.60

 $         82.60

 $         88.60

 $         94.60

Interest

 $         189.90

 $         194.40

 $         198.90

 $         203.40

 $         207.90

Bad debts

 $         207.30

 $         221.80

 $         236.30

 $         250.80

 $         265.30

Other operating expenses

 $         524.80

 $         560.20

 $         595.60

 $         631.00

 $         666.40

Total operating expenses

 $            1,517.30

 $            1,590.00

 $            1,662.70

 $            1,735.40

 $            1,808.10

 

 $  11,002.80

 $  11,480.40

 $  11,958.00

 $  12,435.60

 $  12,913.20

Operating income

 

 

 

 

 

Non Operating income

 $         998.60

 $            1,203.60

 $            1,408.60

 $            1,613.60

 $            1,818.60

Excess of revenue over expenses

 $         309.90

 $         339.60

 $         369.30

 $         399.00

 $         428.70

 

 $            1,308.50

 $            1,543.20

 $            1,777.90

 $            2,012.60

 $            2,247.30

Change in net assets

 

 

 

 

 

Unrestricted

 

 

 

 

 

Temporarily restricted

 $            1,308.50

 $            1,543.20

 $            1,777.90

 $            2,012.60

 $            2,247.30

Permanently restricted

 $                         - 

 $                         - 

 $                         - 

 $                         - 

 $                         - 

Total change in net assets

 $                         - 

 $                         - 

 $                         - 

 $                         - 

 $                         - 

 

 $            1,308.50

 $            1,543.20

 $            1,777.90

 $            2,012.60

 $            2,247.30

Table 1: Trend Analysis

(Source: self generated)

 

Interpreting the resulting data and explaining the significance of the trend results.

The trend analysis showcases the growth or depletion of the firm's operational performance. In the trend analysis above it can be seen that there is growth for Tirranna Healthcare in the future days to come. This is because the sales revenue, profit, and expenses are increasing in the future trends of operations (Kraft, 2015).

Calculate the 5-year total profit margin, asset turnover, return on assets, and return on net worth

 

Profitability Ratios

%

2014

2015

2016

2017

2018

Gross Profit Margin (GPM)

(Gross Profit / Revenue)

86%

85%

84%

84%

83%

Net Profit Margin (NPM)

(Net Income / Revenue)

71%

70%

68%

67%

66%

Return on Capital Employed (ROCE)

(operating profit/ Average Total Capital employed)

137%

129%

126%

121%

116%

Return on Assets

(Net income / Average total assets)

35%

34%

33%

33%

32%

Asset Turnover

(Total sales/ Total sales)

49%

48%

48%

48%

48%

Notes

 

 

 

 

 

 

 

Net Revenue

 $  12,823.00

 $  13,630.00

 $  14,437.00

 $  15,244.00

 $  16,051.00

 

Cost of Sales

 $-1,829.00

 $-2,054.00

 $-2,279.00

 $-2,504.00

 $-2,729.00

 

Gross Profit

 $  10,994.00

 $  11,576.00

 $  12,158.00

 $  12,740.00

 $  13,322.00

 

Net Profit

 $            9,165.00

 $            9,522.00

 $            9,879.00

 $  10,236.00

 $  10,593.00

 

Capital Employed(Total Assets - Current Liabilities)

 $         6,700

 $         7,365

 $         7,821

 $                  8,478

 $                  9,163

 

Debt

            2,400

            3,000

            3,300

                     3,500

                     3,750

 

Total Assets

 $         26,217

 $         28,206

 $         29,895

 $                31,484

 $                33,123

 

Interest

 $         189.90

 $         194.40

 $         198.90

 $                203.40

 $                207.90

Table 2: Profitability Analysis

(Source: self generated)

 

Interpreting the resulting data and determining the company’s profitability

Looking at the profit margins and ratio of return on assets as well as the asset turnover it can be said that the firm will be profitable in the future. Although the profitability will slightly decrease in the future days to come this is negligible. Although the return on capital employed is very high which is abnormal (Robinson, Henry, Pirie & Broihahn, 2015).

Calculate the 5-year current ratio, day’s cash on hand, and working capital

 

Liquidity Ratios

 

2014

2015

2016

2017

2018

Current Ratio

(Current Assets / Current Liabilities)

4.8

5.2

5.6

5.9

6.3

Quick Ratio

(Current Assets - Inventories)/ Current Liabilities

4.4

4.7

5.0

5.3

5.6

Cash Ratio

Cash and Cash equivalent / Current Liabilities

0.1

0.2

0.2

0.2

0.2

 

Notes

Current Assets

            3,359

            3,699

            4,039

                     4,378

                     4,718

 

Current Liabilities

                         693

                         708

                         723

                         737

                         752

 

Inventory

                         327

                         363

                         398

                         433

                         469

 

Cash

                         101

                         116

                         131

                         145

                         160

 

Receivables, net

            2,518

            2,766

            3,014

                     3,262

                     3,510

 

Net Revenue

 $  12,823.00

 $  13,630.00

 $  14,437.00

 $  15,244.00

 $  16,051.00

 

Cost of Sales

 $-1,829.00

 $-2,054.00

 $-2,279.00

 $-2,504.00

 $-2,729.00

 

Accounts payable

                         378

                         386

                         394

                         401

                         409

 

Gross Profit

 $  10,994.00

 $  11,576.00

 $  12,158.00

 $  12,740.00

 $  13,322.00

 

Net Profit

 $            9,165.00

 $            9,522.00

 $            9,879.00

 $  10,236.00

 $  10,593.00

 

Capital Employed(Total Assets - Current Liabilities)

 $         6,700

 $         7,365

 $         7,821

 $                  8,478

 $                  9,163

 

Equity

            4,245

            4,507

            4,769

                     5,031

                     5,293

 

Debt

            2,400

            3,000

            3,300

                     3,500

                     3,750

 

Total Assets

 $         11,943

 $         12,908

 $         13,573

 $                14,137

 $                14,752

 

Interest

 $         189.90

 $         194.40

 $         198.90

 $                203.40

 $                207.90

Table3: Liquidity analysis

(Source: self generated)

 

Interpreting the resulting data and assessing the company’s liquidity

Analyzing the firm's liquidity status it can be said that the firm has financial stability as it has enough liquid assets to cover its current liabilities. The firm although it has low cash or cash equivalent in its current assets. Hence the firm should increase its cash reserve for its daily operation to increase its liquidity (Juárez, 2016).

Calculate the 5-year debt ratio and times interest earned ratio are complete

 

Debt-to-Equity Ratio (D/E)

(Total Debt / Total Equity)

0.6

0.7

0.7

0.7

0.7

Debt-to-Assets Ratio

(Total Debt / Total Assets)

0.2

0.2

0.2

0.2

0.3

Gearing

(Total debt / (Total debt+Total Equity)

36%

40%

41%

41%

41%

Interest Coverage

(EBIT / Interest)

67.5

70.1

72.6

74.9

77.2

 

Notes

Current Assets

            3,359

            3,699

            4,039

                     4,378

                     4,718

 

Current Liabilities

                         693

                         708

                         723

                         737

                         752

 

Inventory

                         327

                         363

                         398

                         433

                         469

 

Cash

                         101

                         116

                         131

                         145

                         160

 

Receivables, net

            2,518

            2,766

            3,014

                     3,262

                     3,510

 

Net Revenue

 $  12,823.00

 $  13,630.00

 $  14,437.00

 $  15,244.00

 $  16,051.00

 

Cost of Sales

 $-1,829.00

 $-2,054.00

 $-2,279.00

 $-2,504.00

 $-2,729.00

 

Accounts payable

                         378

                         386

                         394

                         401

                         409

 

Gross Profit

 $  10,994.00

 $  11,576.00

 $  12,158.00

 $  12,740.00

 $  13,322.00

 

Net Profit

 $            9,165.00

 $            9,522.00

 $            9,879.00

 $  10,236.00

 $  10,593.00

 

Capital Employed(Total Assets - Current Liabilities)

 $         6,700

 $         7,365

 $         7,821

 $                  8,478

 $                  9,163

 

Equity

            4,245

            4,507

            4,769

                     5,031

                     5,293

 

Debt

            2,400

            3,000

            3,300

                     3,500

                     3,750

 

Total Assets

 $         11,943

 $         12,908

 $         13,573

 $                14,137

 $                14,752

 

Interest

 $         189.90

 $         194.40

 $         198.90

 $                203.40

 $                207.90

Table 4: Leverage Analysis

(Source: self generated)

 

Interpreting the resulting data and explaining the company’s long term solvency

The company's debt to asset ratio and Interest coverage ratio is significant and shows positive fiscal stability.  Where Debt to equity ratio shows that the firm’s capital composition is mostly of debt capital whereas the gearing ratio is also high. This means that the firm has higher financial risks that are involved in its financial operations (Shapiro & Hanouna, 2019).

Complete a DuPont analysis for each of the five most recent years

This analysis tells the return on equity employed within the business

DuPont Analysis=Net Profit Margin×AT×EM

=0.66 * 0.48 * 2.4

= 0.76

Interpreting the resulting data and determining the company's individual DuPont characteristics and trends across the analysis period and recommending whether to  purchase Jiranna Healthcare or not

The return of equity that has been calculated using the DuPont analysis shows that rain will be 76% which is a very high and positive return over the future equities that will be employed in the firm's operations.  Looking at the overall profitability and liquidity status this company can be purchased although the capital competition has to be revised to lower financial leverage over the firm’s operations (Madura, 2020).

Part 2: Case Study

Calculating the cash inflows and outflows for each year

 

Year

Revenue

Nurse triage salaries

Forecasted ER cost

IT specialist salary

Cost of facility renovation

Necessary capital equipment purchase

Total cash flow

Tax @20%

Net Cash Flow

0

 

 $                    5,23,800.00

 $                  4,00,000.00

 $            1,50,000.00

 $                               3,00,000.00

 $                                              1,17,000.00

 $            14,90,800.00

 

 $   -14,90,800.00

1

 $            24,22,949.00

 $                    5,49,990.00

 $                  8,00,000.00

 $            1,54,500.00

 $                                         - 

 $                                                    3,510.00

 $              9,14,949.00

 $   1,82,989.80

 $              7,31,959.20

2

 $            29,07,538.80

 $                    5,77,490.00

 $                  8,48,000.00

 $            1,59,135.00

 $                                         - 

 $                                                    3,510.00

 $            13,19,403.80

 $   2,63,880.76

 $            10,55,523.04

3

 $            34,89,046.56

 $                    6,06,364.00

 $                  9,00,577.00

 $            1,63,909.00

 $                                         - 

 $                                                    3,510.00

 $            18,14,686.56

 $   3,62,937.31

 $            14,51,749.25

4

 $            41,86,855.87

 $                    6,36,682.00

 $                  9,55,512.00

 $            1,68,826.00

 $                                         - 

 $                                                    3,510.00

 $            24,22,325.87

 $   4,84,465.17

 $            19,37,860.70

5

 $            50,24,227.05

 $                    6,68,516.00

 $                10,13,798.00

 $            1,73,891.00

 $                                         - 

 $                                                    3,510.00

 $            31,64,512.05

 $   6,32,902.41

 $            25,31,609.64

Table 5: Cash flow

(Source: self generated)

 

Calculating the following metrics:

 

The present value of cash flow

 

Year

Revenue

Nurse triage salaries

Forecasted ER cost

IT specialist salary

Cost of facility renovation

Necessary capital equipment purchase

Total cash flow

Tax @20%

Net Cash Flow

PDF @11%

Present Value of cash flow

0

 

 $                    5,23,800.00

 $                  4,00,000.00

 $            1,50,000.00

 $                               3,00,000.00

 $                                              1,17,000.00

 $            14,90,800.00

 

 $   -14,90,800.00

1

 $                            -14,90,800.00

1

 $            24,22,949.00

 $                    5,49,990.00

 $                  8,00,000.00

 $            1,54,500.00

 $                                         - 

 $                                                    3,510.00

 $              9,14,949.00

 $   1,82,989.80

 $              7,31,959.20

0.909091

 $                                6,65,417.45

2

 $            29,07,538.80

 $                    5,77,490.00

 $                  8,48,000.00

 $            1,59,135.00

 $                                         - 

 $                                                    3,510.00

 $            13,19,403.80

 $   2,63,880.76

 $            10,55,523.04

0.826446

 $                                8,72,333.09

3

 $            34,89,046.56

 $                    6,06,364.00

 $                  9,00,577.00

 $            1,63,909.00

 $                                         - 

 $                                                    3,510.00

 $            18,14,686.56

 $   3,62,937.31

 $            14,51,749.25

0.751315

 $                              10,90,720.70

4

 $            41,86,855.87

 $                    6,36,682.00

 $                  9,55,512.00

 $            1,68,826.00

 $                                         - 

 $                                                    3,510.00

 $            24,22,325.87

 $   4,84,465.17

 $            19,37,860.70

0.683013

 $                              13,23,584.93

5

 $            50,24,227.05

 $                    6,68,516.00

 $                10,13,798.00

 $            1,73,891.00

 $                                         - 

 $                                                    3,510.00

 $            31,64,512.05

 $   6,32,902.41

 $            25,31,609.64

0.620921

 $                              15,71,930.41

Table 6: PV of cash flow

(Source: self generated)

 

 Net present value (NPV)

 

Year

Revenue

Nurse triage salaries

Forecasted ER cost

IT specialist salary

Cost of facility renovation

Necessary capital equipment purchase

Total cash flow

Tax @20%

Net Cash Flow

PDF @11%

Present Value of cash flow

0

 

 $                    5,23,800.00

 $                  4,00,000.00

 $            1,50,000.00

 $                               3,00,000.00

 $                                              1,17,000.00

 $            14,90,800.00

 

 $   -14,90,800.00

1

 $                            -14,90,800.00

1

 $            24,22,949.00

 $                    5,49,990.00

 $                  8,00,000.00

 $            1,54,500.00

 $                                         - 

 $                                                    3,510.00

 $              9,14,949.00

 $   1,82,989.80

 $              7,31,959.20

0.909091

 $                                6,65,417.45

2

 $            29,07,538.80

 $                    5,77,490.00

 $                  8,48,000.00

 $            1,59,135.00

 $                                         - 

 $                                                    3,510.00

 $            13,19,403.80

 $   2,63,880.76

 $            10,55,523.04

0.826446

 $                                8,72,333.09

3

 $            34,89,046.56

 $                    6,06,364.00

 $                  9,00,577.00

 $            1,63,909.00

 $                                         - 

 $                                                    3,510.00

 $            18,14,686.56

 $   3,62,937.31

 $            14,51,749.25

0.751315

 $                              10,90,720.70

4

 $            41,86,855.87

 $                    6,36,682.00

 $                  9,55,512.00

 $            1,68,826.00

 $                                         - 

 $                                                    3,510.00

 $            24,22,325.87

 $   4,84,465.17

 $            19,37,860.70

0.683013

 $                              13,23,584.93

5

 $            50,24,227.05

 $                    6,68,516.00

 $                10,13,798.00

 $            1,73,891.00

 $                                         - 

 $                                                    3,510.00

 $            31,64,512.05

 $   6,32,902.41

 $            25,31,609.64

0.620921

 $                              15,71,930.41

 

 

 

 

 

 

 

 

 

 

NPV

 $                              40,33,186.58

Table 7: NPV

(Source: self generated)

 

Internal rate of return (IRR) and Modified internal rate of return (MIRR)

 

IRR calculation

Year

 

0

 $   -14,90,800.00

1

 $              7,31,959.20

2

 $            10,55,523.04

3

 $            14,51,749.25

4

 $            19,37,860.70

5

 $            25,31,609.64

Interest Rate

10%

IRR

70%

MIRR

63.58%

Table 8: IRR and MIRR

(Source: self generated)

 

Payback period

 

Payback Period

Year

Cash flow

Balance

0

 $   -14,90,800.00

 $         -14,90,800.00

1

 $              7,31,959.20

 $         -7,58,840.80

2

 $            10,55,523.04

 $        2,96,682.24

3

 $            14,51,749.25

 $                  17,48,431.49

4

 $            19,37,860.70

 $                  36,86,292.19

5

 $            25,31,609.64

 $                  62,17,901.82

 

PBP

3.6

Table 9: Payback period

(Source: self-generated)

 

Discounted payback period

 

Discounted Payback Period

Year

PV OF Cash flow

Balance

0

 $   -14,90,800.00

 $         -14,90,800.00

1

 $              6,65,417.45

 $         -8,25,382.55

2

 $              8,72,333.09

 $                        46,950.55

3

 $            10,90,720.70

 $                  11,37,671.24

4

 $            13,23,584.93

 $                  24,61,256.17

5

 $            15,71,930.41

 $                  40,33,186.58

 

DPBP

2.0

Table 10: Discounted payback period

(Source: self-generated)

 

Recommendation with rationale

Looking at the results that have been generated through the help of the capital budgeting process it can be said that the following investment option is viable. The Cash flow from operations that will be Generated through the future years of operations will tend to increase and this will have a positive effect on the revenue-generating capability of the firm. Now the Present value of cash flow is also positive this invests very bible in nature as well because this shows the future value of monetary incomes that are expected to happen in the future. The NPV calculation shows that the investment will generate positive cash flow after deducting the initial investment done by the company in this healthcare unit. The internal rate of return and Mixed internal rate of return is also positive and the rates are pretty high showing signs that the investment will generate a high and stable return in the future. The payback period and the discounted payback period is low and formidable showing the firm will generate the initial investment in a lower period (Jones, Finkler, Kovner & Mose, 2018).  The option is better for the Company when compared looking at the principle of the form for accepting investment options.

Part 3: Conducting a budgeting evaluation

Analyzing the original profit forecast and revised projection

It is important to understand the profit project done in the initial of making the budget projected that the firm will generate an earning of $9506 but in a midway, for the financial year it was seen that the generated an earning of $4664 this shows that the actual earnings were not in one of the projected ones. This shows that the budget was not created looking at the demand which is, therefore, a different process and it would be more accurate if the following method of budgeting would have been implied. Many of the earning are overrated while some are under-budgeted causing such discrepancy in the creation of budgets.

Identifying and analyzing inpatient service lines are over budget after accounting for workload increases

Inpatient service lines such as Mental Health, OB and Other are over budget. This is because it can be seen that the budgeted amount for these services is very high that what has been achieved. The following have measures to be overly budgeted even after the workload increases and this is the reason because the budget is inaccurately prepared. Even if the demand increased workload increase the budget prepared will not be achieved affecting the budgeting process of the firm (Finkler et al. 2018).

Two actions recommend being taken at the mid-year point

Now it is important to understand that looking at the budget it can be said that the budgeting showed an increase of expense over the revenue that will be generated by the company. Now this shows that the firm will not generate profit if the forecast made goes right.  Hence it is important to make some changes to make sure that the performance of the services increases and the company will be able to generate better revenue and performance from the services. The recommendations are as follows;

  1. Optimize the overly budgeted expenses so that the firm can increase its profit margin
  2. To increase the faculties in the hospital for the service that has a higher demand in the region.

In these two ways, the company will be able to increase performance through its services.

Two recommendation for a Capitated hospital in the mid-year point

The two recommendations that will be used in Capitated hospital to measure the performance has increased is as follows;

  1. In managing the cost in a more precise manner so that the overall cost and revenue generated can be incurred from the healthcare providers.
  2. Separate creation of budget through a separate budgeting process in which new budgets are created must be followed to precisely analyze and establish the firm's earning and expenses (Banerjee, 2015).
     

References

Banerjee, B. (2015). Fundamentals of financial management. PHI Learning Pvt. Ltd.

Finkler, S. A., Smith, D. L., & Calabrese, T. D. (2018). Financial management for public, health, and not-for-profit organizations. CQ Press.

Jones, C., Finkler, S. A., Kovner, C. T., & Mose, J. (2018). Financial Management for Nurse Managers and Executives-E-Book. Elsevier Health Sciences.

Juárez, F. (2016). Chaos theory and financial statements. International Journal of Mathematics, Game Theory, and Algebra, 25(4).

Kraft, P. (2015). Rating agency adjustments to GAAP financial statements and their effect on ratings and credit spreads. The Accounting Review, 90(2), 641-674.

Madura, J. (2020). International financial management. Cengage Learning.

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. John Wiley & Sons.

Shapiro, A. C., & Hanouna, P. (2019). Multinational financial management. Wiley.2500

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