XYZ Hospital

XYZ Hospital is planning to invest in a new primary healthcare facility. The hospital will be
located in a backward rural area of Gujarat. The hospital wants to forecast the overall
profitability of the project over the useful life of the healthcare facility. The initial capital
investment in the facility is Rs. 8,000,000. The equipment in the facility have a useful life of 5
years and the expected residual value at the end of the five years for tax purposes is supposed to
be zero. The following table indicates the expected patient capacity and the costs and revenues
associated with each patient.
Year 1 2 3 4 5
Total Capacity 100000 100000 100000 100000 100000
Utilized Capacity 70% 80% 80% 90% 90%
Per Unit Selling Price and Costs (Rs.)
Revenue p.u. 200
Medical supplies 20
Doctor Fees 100
Variable Nurse Cost 20
Fixed Nurse Cost 10
Variable Admin Expense 10
Fixed Admin Expense 20
 As per the budgeting division, the revenues for the facility are expected to grow at the rate of
5% every year. All costs associated with doctor fees, medical supplies and nurses are expected
to grow at 4% every year. (Revenues and Variable Costs increase by a factor of Inflation and
Capacity Utilization; Fixed Costs only increase by a factor of Inflation)
 The equipment associated with the facility can be sold after 5 years for Rs. 500,000.
 To facilitate treatment for patients who are economically backward and insurance claim delays,
all fees were collected one month after all the necessary medical services are provided. All
purchases of medical supplies are paid off after 1.5 months from the date of purchase. To
ensure continuous service the hospital plans to maintain half a months’ worth of medical
supplies on hand at any given point of time. (Acc Receivables + Inventory - Acc Payables =
Working Capital)
 The hospital currently has a debt to capital ratio of 10%. However, it plans to finance the
current project with a bank loan bearing an interest rate of 7.5%. The borrowing for the current
project will change the company’s debt to capital ratio to 20%. The associated weighted
average cost of capital (WACC) at that debt to capital ratio is 12%.
 As a result of undertaking this new project the company is annually expected to lose Rs.
100,000 in net income from its other facilities.
Assuming a tax rate of 30%, calculate the cash flows for the duration of the project (up to
two decimal places) and also calculate the NPV of the project. Show all possible
calculations. Please explicitly list any assumptions that you make.
WACC = (1-Tax Rate) D%(D/D+E) + E%(E/D+E)
D = Debt; E= Equity; The cost of Equity and Debt weighted by the proportion of
debt and equity in the capital structure