You’ve now completed the base figures for your financial analysis. You know the amount of Net Income each proposal will bring in each year. With that information you are prepared to move on to the next step in the financial analysis – calculating the Net Present Value (NPV).

Comparing the Projects
The proposals we are looking at are actually quite different. The net income calculation showed you that some proposals will make more money than others, but you can’t really compare them yet. One major roadblock stands in your way and that is time.

Each project scheduled for a different length of time. So one project is making money over 12 years, while one is only making money over 8 years. You need a way to standardize the lengths of time, so you can compare them.

That’s what Net Present Value will let you do. Net Present Value is a financial tool that translates future earnings into today’s money. By looking at everything in today’s money you can make a decision about which project is best financially.

A Missing Piece
You have almost everything we need for the NPV analysis, but one important detail is missing. Because Woodland Ridge Hospital’s Board of Directors will ultimately decided which project they want to fund, they also get to determine how risky they feel each project is. They do this by setting a cost of capital. I’ll get into all the details later, but basically the riskier they believe the project is, the higher they set the cost of capital.

You need to know what the cost of capital will be in order to complete our Net Present Value calculations and the Board hasn’t decided yet. I’ll call Mr. Bennett again and see if he has heard anything. I’ll send you an email as soon as I have the details.

More to come,

Abby

Abigail Vincent
Sr. Consultant
WJL Consulting