Question: Basic Net Present Value Analysis, Competing Projects Kildare Medical Center, a for-profit hospital, has three investment opportunities: (1) adding a wing for in-patient treatment of substance abuse, (2) adding a pathology laboratory, and (3) expanding the outpatient surgery wing. The initial investments and the net present value for the three alternatives are as follows:
Substance Abuse Laboratory Outpatient Surgery
Investment $1,500,000 $500,000 $1,000,000
NPV 150,000 140,000 135,000
Although the hospital would like to invest in all three alternatives, only $1.5 million is available. Required:
1. Rank the projects on the basis of NPV, and allocate the funds in order of this ranking. What project or projects were selected? What is the total NPV realized by the medical center using this approach?
2. Conceptual Connection: Assume that the size of the lot on which the hospital is located makes the substance abuse wing and the outpatient surgery wing mutually exclusive. With unlimited capital, which of those two projects would be chosen? With limited capital and the three projects being considered, which projects would be chosen?
3. Conceptual Connection: Form a group with two to four other students, and discuss qualitative considerations that should be considered in capital budgeting evaluations. Identify three such considerations.