Mr. Bennett took your work back to the Board of Directors after reviewing it and thinking about some of their previous capital investment projects they set the following costs of capital for the projects:

• CyberKnife – 13%


• Alzheimer’s Unit – 7%


• Dialysis Center – 5%


• Remodel – 3%

The NPV calculations you’ve already conducted should have given you a sense of the money each option can bring in. Now we’ll be able to get a firm idea about which option is the most profitable. There is one more thing that will be important to our client – when do they pay off their investments and start keeping the profits?

Even though the NPV calculations you’ve done have been positive that doesn’t mean the hospital is actually making money yet. They have to pay off the initial investment before they are actually making money for themselves.

Your Job
You need to determine the payoff point for each of the four investment projects. Payoff point depends on the cost of capital. The more the hospital has to pay back to the Board of Directors the longer it will take for them to payoff the project.

Here’s what you need to do:

• Now that we are sure of the Cost of Capital for each project, calculate the Present Values and Net Present Values for each option. You’ll need these figures to determine each project’s payoff point.


• In order to figure out how long something will take to payoff you also need to know how much you spent in the first place. The same thing is true here. You’ll need to gather information on start-up costs for each project. Start-up costs are the money the hospital has to pay and the beginning of a project in order to get that project up and running.


• Finally, you’ll need to determine the payoff point for each project.

This analysis will be an important part of your final presentation to the client. As you have done in previous steps of this analysis, you should also take some time to write a description of the work you did and what your results mean. This will help you later when you prepare your final presentation.

I’ll review your results when you analysis is complete.

Abby

Abigail Vincent
Sr. Consultant
WJL Consulting