# Week 7 Assignment: Financial Analysis

Week 7 Assignment: Financial Analysis

To make informed decisions and achieve strategic goals, health care leaders must carefully analyze an organization’s financial position. A ratio analysis, for example, may impact decisions for strategic initiatives such as expansions, consolidations, mergers, and acquisitions. For this Assignment, you calculate financial ratios and consider their implications for organizations.

To prepare:

Review the Week 7 Assignment document in this week’s Learning Resources. Examine the financial data for the health care organizations in each scenario.

Note: Your Assignment should show effective application of triangulation of content and resources in your conclusion and recommendations.

The Assignment

Using the scenarios and financial data provided in the Week 7 Assignment document, calculate financial ratios and evaluate their implications on organizational decision making.

Week 7 Assignment: Financial Analysis

Scenario 1: ABC Hospital

In the scenario involving ABC Hospital, option one appears to be the most recommendable one. In the option, ABC would spend \$11,995,000 in the development of a new facility focusing on the treatment of cancer. The decision is based on a financial analysis, including a Net Present Value and Future Earnings calculation.

 Present Value FE Y1 FE Y2 FE Y3 FE Y4 Year 1 \$1,836,547.29 2,000,000 Year 2 \$3,372,905.95 \$4,000,000 Year 3 \$3,871,563.31 \$5,000,000 Year 4 \$5,688,247.28 \$8,000,000 Total PV of FE \$14,769,264.00 Investment \$-11,995,000.00 Net PV \$2,774,264.00

The table shows the calculation of the present value for each year. The PV of each year is calculated by using the formula Future Earnings × [1/ (1 + i) ^n], whereby i represents the discount rate (8.9%) and n represents the number of years. The total present value of future earnings exceeds the investment value. Thus, the net present value of the investment shows that the facility would generate enough future earnings to be able to cover the initial cost of the investment, which tends to make it viable.

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Scenario 2: Serenity Health Care

The objective of computing the financial ratios is to advise the board on whether acquiring Hall Healthcare Systems is viable. The acid-test ratio measures the ability of an entity to use its quick assets or near cash to retire the current liabilities that it has immediately. In addition, the current ration measures whether an entity has sufficient resources to settle its short-term obligations.

 2015 2014 Total current assets / Total current liabilities \$13,848,196 / \$12,934,411 \$18,779,217 / \$19,708,798 Current Ratio 1.07 0.95 Total current assets – inventory / Total current liabilities \$11,180,805 / \$12,934,411 \$13,189,141 / \$19,708,798 Acid Ratio 0.86 0.67

Based on the calculations, Hall Healthcare Systems current ratio for the most recent year, 2015, indicates that the firm has adequate resources to cover its short term obligations. However, current ratio for 2014, 0.67, indicates that the facility may not have had enough resources to settle its short term obligations. The acid ratio, on the other hand, was 0.67 and 0.86 for 2014 and 2015 respectively. The ratios, which are less than 1, indicate that Hall Healthcare Systems does not have sufficient near cash or quick assets to cover its short term liabilities immediately. Based on the current ratio, I would advise the CEO to make the acquisition. However, since the acid ratio is less than 1, it is important for Serenity Healthcare to make additional considerations.

Week 7 Assignment: Financial Analysis

Scenario 3: Montgomery Home and Community-Based Services

Break-even volume = Total fixed costs / (Average charge per client – Average variable cost per client)

Total fixed costs = \$6,090, Average charge per client = \$200, Average variable cost per client = \$145. Therefore,

Break –even volume = \$6,090 / (\$200-\$145) = 111 clients

The break-even volume represents the number of clients that would be needed for the new facility to have all its expenses paid for appropriately and to break even. At present, only 15 retired seniors are willing to pay the fee to access the center. Therefore, the investment is not viable, unless the CEO would be willing for 3 years when 120 retired seniors would join the center.

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Payback Period

 Year Yearly Cash Flow Cumulative Cash Flow 0 (\$317,880) (\$317,880) 1 \$25,700 (\$292,180) 2 \$40,000 (\$252,180) 3 \$78,000 (\$174,180) 4 \$225,000 \$50,820 5 \$310,000 \$360,820

Payback Period = A + (B/C)

=4.14 = 4 + (50,820/360,820)

Therefore, the payback period tends to be more than 4 years, which means that it would take more than for years to cover the costs associated with the initial investment.

References

Kampf, R., Majerčák, P., & Švagr, P. (2016). Application of break-even point analysis. NAŠE MORE: znanstveno-stručni časopis za more i pomorstvo63(3 Special Issue), 126-128.

Lane, K., & Rosewall, T. (2015). Firms’ investment decisions and interest rates. Firms’ Investment Decisions and Interest Rates 1 Why Is Wage Growth So Low? 9 Developments in Thermal Coal Markets 19 Potential Growth and Rebalancing in China 29 Banking Fees in Australia 39, 1.

Leyman, P., & Vanhoucke, M. (2016). Payment models and net present value optimization for resource-constrained project scheduling. Computers & Industrial Engineering91, 139-153.

Penman, S. H. (2015). Financial Ratios and Equity Valuation. Wiley Encyclopedia of Management, 1-7.

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