Introduction
Net Present Value (NPV) is the monetary value difference between a project value of cash presently and the future value of cash. NPV is a tool used in project management to determine if a particular investment in the project is worth undertaking. It determines if the future financial gains will be much better than the current investment gains. This paper aims to find the viability of expansion in a surgical unit of a hospital corporation by determining the project’s NPV.
However, the NPV analysis is disadvantaged by future uncertainties since it makes assumptions about future occurrences that cannot be foretold or known. Such events include war, inflation, and natural calamities. Indeed, where inflation is a factor, the inflation percentage must be considered in calculating NPV.
Consequently, when calculating NPV and its value is found to be positive, it shows that the investment will be profitable and provides an answer to the investors on whether to go ahead with the investment. A negative NPV, on the other hand, indicates that the project will incur lower returns in the future than the current investment and a zero NPV indicates the return will be the same as the discount rate only.
Calculations
Calculation of the NPV has to factor in factors such as value for money today and in the future, inflation, the investment period, and the net cash flow. The NPV can be calculated using an arithmetic formula, excel tabulations, or certified online calculators. Such an online calculator includes the Analytic Solver Platform that was used to analyze this project.
- The following are the parameters used in calculating the NPV;
- Initial investment = $12, 000,
- 8% discount rate,
There is a 15% cash flow growth for every quarter, and the expenses that would have been subtracted from the quarter are negligible, considering that the standard deviation is $5000, which is almost equal to the expenses for the two quarters.
- Quarter 1 cash inflow = $175,000
- Quarter 2 cash inflow = 1.15*175,000= $ 201,250
- Quarter 3 cash inflow = 1.15*201,250=$ 231,437.5
- Quarter 4 cash inflow = 1.15*231437.50=$ 266,153.13
Results
Using the online calculator, as indicated in the attached snapshots below, the calculation of NPV is done using the inbuilt formula.
Therefore, using the arithmetic formula for NPV= $701,929.52.
The calculation gave a positive NPV; this is an indication that the investment will give a profitable income much better than the present value. However, finding NPV assumes that inflation will not be a significant factor in the USD value. Therefore, the recommendation to the board is that their investment of $12,000 in expanding a surgical unit in the hospital will give the investment a profit and have a Present Net Value of $701 929.52 with a discounted rate of 8%. Hence, it is wise for the board to invest in the expansion.
Conclusion
The NPV analysis is a vital tool used to advise on the investment and viability. Nevertheless, its effectiveness depends on the accuracy of the information that has been used to calculate it. The investor should be able to provide an accurate discounting rate and the exact cash inflows amounts. Also, it is essential to note that inflation will influence the end conclusion; it is essential to include it in the final calculation of the net present value.
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