Capital Budgeting Analyses

Capital Budgeting Analysis for
Medical Services USA
Purpose of Spreadsheet

Supplemental Material for Short Course 3: Cap
Budgeting Analysis, located on the internet at
www.exinfm.com/training. Prepared by: Matt H
Evans, CPA, CMA, CFM

Illustrate concepts related to capital budgeting analysis of projects. Certain aspects of a capital
project may have not been included in order to help highlight basic concepts, such as
Net Present Value. The spreadsheet is setup to evaluate six different projects and summarize
all projects based on both economic analysis and risk factors assigned.
Note: The Solver feature of Excel is used in an example at the end. Please make sure that you
have installed Solver: Solver add-on feature (Tools => Add-Ins => Solver).
Economic Analysis
Three economic criteria are applied to projects: Net Present Value, Modified Internal Rate of
Return and Discounted Payback Period. If your project(s) have non-periodic payments
(payments are not equal over the life of the project), then you should use these Excel Functions:
=XNPV for Net Present Value by entering specific dates of cash flows
=XIRR for Internal Rate of Return by entering specific dates of cash flows
Cell Indicators
Certain cells are highlighted as follows:
Selected input cells (not all input cells are highlighted since each project is unique)
Cell includes a comment - move mouse and point over cell for comment
Indication of an error in calculation or a red flag that a criteria has not been met
Organization of Spreadsheet
Lead Worksheet
Project A Analysis - Example with Annual Cash Flow Calculations
Project B Analysis - Example with Sunk Costs & Projected Financials
Project C Analysis - Example of Upgrade Investment
Project D Analysis - Example of Project Financing
Project E Analysis - Example of Foreign Investment
Project F Analysis - Example of Monthly Inflows / Outflows
Summary and Example of Using Excel Solver
Answer Report 1 - Output from Using Excel Solver in Summary Example
General Input
The following general inputs have been used on different worksheets:
A
B
C
D
E
F

Diesel Generation System
<= Enter project name
New Clinic in Kansas City
<= Enter project name
Upgrade to DuBois Center
<= Enter project name
Southeastern Upgrades
<= Enter project name
Canadian Partnership
<= Enter project name
Regulatory Compliance NE
<= Enter project name
27.50% <= Marginal Tax Rate *

9.50% <= Weighted Average Cost of Capital
$10,000 <= Threshold investment amount where formal project analysis
is not required - general expenditure item.
* If you expect changes in future tax rates, you may want to consider these changes
in your analysis.
Project Codes (Used to help categorize various capital projects)
Project Classification Codes:
1 Land
2 Buildings
3 Leasehold Improvement
4 Equipment
5 Furniture and Fixtures
6 Vehicles
7 Acquisitions
8 Investments
9 Other
Primary Justification for Project:
A Cost Reduction
B Replacement
C Expansion / Addition
D Service Improvement
E Safety & Compliance
F Operating Necessity
G Other
Priority Code:
1 Carry over project, already in progress, requires additional funding
2 Essential for continued operations, regulatory compliance, etc.
3 Economically desired for revenue growth, cost reductions, etc.
4 General improvement for building or expanding the business

erial for Short Course 3: Capital
s, located on the internet at
raining. Prepared by: Matt H.
CFM
Lead Wks
Project A
Project B
Project C
Project D
Project E
Project F
Summary

ormal project analysis

A

Capital Budgeting Analysis for
Medical Services USA
Diesel Generation System

Project Information
Project Description > New diesel backup system for high volume medical plant
Project Benefits >
Eliminate downtime, improve efficiency, better service
Project Location >
Mobile, AL
Responsible Division >
Southern
Responsible Department >
Plant Engineering
Contact Person Name >
John Pearson, Southern Div Manager
Estimated Project Start Date >
01/01/92
Classification >
4
Justification >
F
Priority >
2
Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1
Project improves overall profitability of the company
F2
Project lowers cost structure
F3
Project will generate a rate of return
F4
Project improves asset utilization
F5
Other Financial Attribute __________________________________
F6
Other Financial Attribute __________________________________

2
3
3
1
0
0

Operating Attributes:
O1
Improves operating efficiencies
O2
Increases the customer base
O3
Improves overall customer service
O4
Improves competitive position of company
O5
Other Operating Attribute _________________________________
O6
Other Operating Attribute _________________________________

4
0
0
0
0
0

Contingency Attributes:
C1
Project has options that allow for change during life
C2
Project will positively impact company even if value is negative
C3
Project can be abandoned easily with some positive value
C4
Project permits several options to maximize value
C5
Other Cont Attribute _____________________________________

2
4
1
2
0

Miscellaneous Attributes:
M1
Expands Human Resource Capital
M2
Enhances workforce productivity

0
0

M3
M4
M5
M6
M7
M8

Project meets a critical regulatory, security or specific need
Project fits with company strategy and goals
Probability of project success is very high / low risk
Other Misc Attribute _____________________________________
Other Misc Attribute _____________________________________
Other Misc Attribute _____________________________________
Total Preliminary Points

0
1
4
0
0
0
27

Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Financial Analysis

Proposed Project Expenditure:
* Equipment & Facilities (purchase price)
* Installation Cost
* Labor
* Materials
* Shipping
* Taxes
Other Costs (expensed)
Intial Cash Outlay for Project
Tax Breaks for Investment
Sale of Existing Assets
Tax Benefit on Loss - Sale of Assets
Total Project Investment
Project Analysis Required?

165,000
650
4,500
250
1,280
11,550
350
183,580
(1,500)
0
0
182,080
Yes

* capitalized costs subject to depreciation using double declining method over 8 years with $ 8,000 salvag
NOTE: Depreciation for tax purposes is considered the same for accounting purposes. If tax depreciation
different than accounting depreciation, deduct tax depreciation in calculating taxes.
Cash Flows associated with Project:
Year 1:
Reductions in annual operating costs
New revenues from higher output volumes
Eliminate third party vendor service
Annual service and maintenance
Annual fuel costs
Depreciation:
Cost
183,230
Salvage Value
8,000
Useful Life
8
Depreciation in Yr
1
Operating Cash Flow in Year 1
Less Taxes

28,900
6,200
35,000
(4,600)
(1,500)

(45,808)
18,193
(5,003)

Net Income - Year 1
Add Back Non Cash Depreciation
Change to Net Working Capital
Net Cash Flow - Year 1
Year 2:
Reductions in annual operating costs
New revenues from higher output volumes
Eliminate third party vendor service
Annual service and maintenance
Annual fuel costs
Depreciation:
Cost
183,230
Salvage Value
8,000
Useful Life
8
Depreciation in Yr
2
Operating Cash Flow in Year 2
Less Taxes
Net Income - Year 2
Add Back Non Cash Depreciation
Change to Net Working Capital
Net Cash Flow - Year 2
Year 3:
Reductions in annual operating costs
New revenues from higher output volumes
Eliminate third party vendor service
Annual service and maintenance
Annual fuel costs
Depreciation:
Cost
183,230
Salvage Value
8,000
Useful Life
8
Depreciation in Yr
3
Operating Cash Flow in Year 3
Less Taxes
Net Income - Year 3
Add Back Non Cash Depreciation
Change to Net Working Capital
Net Cash Flow - Year 3
Year 4:
Reductions in annual operating costs
New revenues from higher output volumes
Eliminate third party vendor service
Annual service and maintenance
Annual fuel costs
Depreciation:
Cost
183,230
Salvage Value
8,000

13,190
45,808
(3,500)
55,497

32,100
6,900
35,000
(5,000)
(1,800)

(34,356)
32,844
(9,032)
23,812
34,356
(650)
57,518

34,800
7,100
35,000
(5,000)
(2,000)

(25,767)
44,133
(12,137)
31,997
25,767
(550)
57,213

37,200
7,900
0
(5,200)
(2,100)

Useful Life
Depreciation in Yr
Operating Cash Flow in Year 4
Less Taxes
Net Income - Year 4
Add Back Non Cash Depreciation
Change to Net Working Capital
Net Cash Flow - Year 4

8
4

Year 5:
Reductions in annual operating costs
New revenues from higher output volumes
Eliminate third party vendor service
Annual service and maintenance
Annual fuel costs
Depreciation:
Cost
183,230
Salvage Value
8,000
Useful Life
8
Depreciation in Yr
5
Operating Cash Flow in Year 5
Less Taxes
Net Income - Year 5
Add Back Non Cash Depreciation
Change to Net Working Capital
Net Cash Flow - Year 5
Year 6:
Reductions in annual operating costs
New revenues from higher output volumes
Eliminate third party vendor service
Annual service and maintenance
Annual fuel costs
Depreciation:
Cost
183,230
Salvage Value
8,000
Useful Life
8
Depreciation in Yr
6
Operating Cash Flow in Year 6
Less Taxes
Net Income - Year 6
Add Back Non Cash Depreciation
Change to Net Working Capital
Net Cash Flow - Year 6
Year 7:
Reductions in annual operating costs
New revenues from higher output volumes
Eliminate third party vendor service
Annual service and maintenance

(19,325)
18,475
(5,081)
13,394
19,325
(250)
32,469

40,900
8,900
0
(5,300)
(2,200)

(14,494)
27,806
(7,647)
20,160
14,494
(350)
34,303

44,200
9,700
0
(5,400)
(2,300)

(10,870)
35,330
(9,716)
25,614
10,870
(150)
36,334

50,100
10,200
0
(5,500)

Annual fuel costs
Depreciation:
Cost
Salvage Value
Useful Life
Depreciation in Yr
Operating Cash Flow in Year 7
Less Taxes
Net Income - Year 7
Add Back Non Cash Depreciation
Change to Net Working Capital
Net Cash Flow - Year 7

(2,400)
183,230
8,000
8
7

Year 8:
Reductions in annual operating costs
New revenues from higher output volumes
Rebuild / Repair Unit Option
Annual service and maintenance
Annual fuel costs
Depreciation:
Cost
183,230
Salvage Value
8,000
Useful Life
8
Depreciation in Yr
8
Operating Cash Flow in Year 8
Less Taxes
Net Income - Year 8
Add Back Non Cash Depreciation
Change to Net Working Capital
Net Cash Flow - Year 8
Terminal Year 9
Salvage Value of Asset
Working Capital Reversed
Terminal Value

(8,153)
44,247
(12,168)
32,079
8,153
(150)
40,082

55,500
11,000
(25,000)
(4,600)
(2,600)

(6,115)
28,185
(7,751)
20,434
6,115
(50)
26,499

5,000
2,500
7,500

At the end of Year 8, a decision will be made to either rebuild the asset or outsource to third party.
Economic Analysis
Summarize Cash Outflows and Inflows for Project:
Cash
Present
Recovery
Year
Flows
Value
Payback
0
(182,080)
(182,080)
1
55,497
49,997
(132,083)
2
57,518
46,683
(85,400)
3
57,213
41,834
(43,566)
4
32,469
21,389
(22,177)
5
34,303
20,357
(1,820)
6
36,334
19,426
17,606 <= payback

7
40,082
8
26,499
9
7,500
Net Present Value

19,306
11,499
2,932
51,342

36,912
48,410
51,342

Required Rate of Return for Project =>
Reinvestment Rate for Project =>
Net Present Value
Modified IRR
Discounted Payback (years)

11.00%
6.00%
$51,342
11.03%
6.1

Economic Assessment
Project has positive Net Present Value?
Project has IRR in excess of cost?
Project has a positive payback?

Yes
Yes
Yes

Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.

Risk Analysis
Risk Premium Applied to Project

1.50%

Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond
1.00 (a)
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)
1 (b)
Exponential power to apply to Risk Ranking is 2 - (a)
1 (c)
Risk Factor = (b) raised to the power (c)
1
Probability of Accurate and Reliable Information for Project
Risk Ranking assigned to project (1 to 10)
Exponential power to apply to Project
Risk Factor for Project
Assign probabilities to three possible outcomes for project:
P Pesimistic outlook, declining growth, slower volumes, etc.
N Normal expected outlook as applied in analysis
O Optomistic outlook, better than expected growth
Total should equal
100.00%

0.6
5
1.4
10

25.00%
60.00%
15.00%
100.00%

Enter Expected Cash Flows for different outcomes:

Year

Pesimist

Net Cash Flows
Normal
Optomist

Expected
Value

Standard
Deviation
(Abs Risk)

Coeff of
Variation
(Rel Risk)

1
2
3
4
5
6
7
8
Terminal
Totals

41,800
39,750
37,400
26,200
21,050
13,200
11,800
8,100
1,000
200,300

55,497
57,518
57,213
32,469
34,303
36,334
40,082
26,499
7,500
347,416

64,900
67,300
66,100
41,050
40,900
39,800
40,800
35,700
8,500
405,050

53,483
54,543
53,593
32,189
31,979
31,071
33,119
23,279
6,025
319,282

Absolute Risk of Project (Std Deviation)
Relative Risk of Project (Coeff of Variation)

17,758
21,584
22,854
10,699
15,679
22,531
25,430
21,793
6,346
164,674
164,674
0.516

Revised Economic Analysis using Expected Values

Year
0
1
2
3
4
5
6
7
8
9
Totals

Expected
Value
(182,080)
53,483
54,543
53,593
32,189
31,979
31,071
33,119
23,279
6,025

Net Present Value
Modified IRR
Discounted Payback (years)

Present
Recovery
Value
Payback
(182,080)
48,183
(133,897)
44,268
(89,628)
39,187
(50,442)
21,204
(29,238)
18,978
(10,259)
16,612
6,352 payback
15,952
22,304
10,102
32,406
2,355
34,761
34,761
$34,761
10.07%
6.6

0.332
0.396
0.426
0.332
0.490
0.725
0.768
0.936
1.053
0.516

d over 8 years with $ 8,000 salvage value
nting purposes. If tax depreciation is

or outsource to third party.

B

Capital Budgeting Analysis for
Medical Services USA
New Clinic in Kansas City

Project Information
Project Description > New Walk In Clinic - Kansas City
Project Benefits >
Toehold market position, profit center, business expansion
Project Location >
Kansas City
Responsible Division >
Mid West
Responsible Department >
Business Development
Contact Person Name >
Bill Watson, Operations Director
Estimated Project Start Date >
04/01/92
Classification >
2
Justification >
C
Priority >
3
Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1
Project improves overall profitability of the company
F2
Project lowers cost structure
F3
Project will generate a rate of return
F4
Project improves asset utilization
F5
Other Financial Attribute __________________________________
F6
Other Financial Attribute __________________________________
Operating Attributes:
O1
Improves operating efficiencies
O2
Increases the customer base
O3
Improves overall customer service
O4
Improves competitive position of company
O5
Other Operating Attribute _________________________________
O6
Other Operating Attribute _________________________________
Contingency Attributes:
C1
Project has options that allow for change during life
C2
Project will positively impact company even if value is negative
C3
Project can be abandoned easily with some positive value
C4
Project permits several options to maximize value
C5
Other Cont Attribute _____________________________________
Miscellaneous Attributes:
M1
Expands Human Resource Capital
M2
Enhances workforce productivity
M3
Project meets a critical regulatory, security or specific need
M4
Project fits with company strategy and goals
M5
Probability of project success is very high / low risk
M6
Other Misc Attribute _____________________________________

M7
M8

Other Misc Attribute _____________________________________
Other Misc Attribute _____________________________________
Total Preliminary Points

Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Financial Analysis
Proposed Project Expenditure:
Rework / Upgrade Existing Building
Equipment and Fabrication
Marketing and Promotion of Clinic
Contingency Costs
Market Study / Research
Total Project Investment
Project Analysis Required?

85,000 (1)
45,000 (2)
7,500
3,500
2,500 <= exclude since sunk cost, not rele
141,000
Yes

(1): Depreciated over 30 years using the straight line method with no salvage value.
(2): Depreciated over 12 years using the declining balance method with no salvage value.
Tax depreciation and accounting depreciation are considered the same.
Working Capital Requirements:
Historical analysis of other similar clinics indicates that clinics require:
Cash
Accounts Receivable
Inventories
Total Current Assets
Accounts Payable
Other accruals
Total Current Liab
Net Working Capital
Sales Revenues
Ratio (NWC / Sales)

3,500
7,500
5,000
16,000
6,000
4,000
10,000
6,000
60,000
10.00%

The above Ratio will be applied to estimate working capital requirements
Opportunity Cost Analysis:
As a result of this project investment, the company expects some negative impact to its
Topeka, Kansas facility as follows:
Year 1
Year 2
Reduction to Sales Revenues
(4,000)
(5,000)
Reductions in overall cost
1,500
2,000
Net Reduction to Income
(2,500)
(3,000)
Five Year Financial Forecast:

Sales Revenues

Year
1
65,000

Year
2
75,000

Cost of Services:
Personnel / Labor
Supplies, Vendors, etc.
Adm Overhead Increases
Opportunity Cost (per above)
Profit before Tax
Taxes
Investment Credits
Net Profit
Depreciation:
Upgrade to Building
Useful Life =>
30
Equipment
12
Operating Cash Flow
Net Working Capital
Planned Critical Cash Outlays
Total Cash Flow

(15,000)
(8,000)
(22,000)
(2,500)
17,500
(4,813)
50
12,738

(18,000)
(10,000)
(28,000)
(3,000)
16,000
(4,400)
0
11,600

2,833

2,833

6,923
22,494
(6,500)
(1,500)
14,494

6,346
20,779
(7,500)
(2,500)
10,779

Economic Analysis
Summarize Cash Outflows and Inflows for Project:
Cash
Present
Year
Flows
Value
0
(141,000)
(141,000)
1
14,494
12,883
2
10,779
8,517
3
17,723
12,447
4
30,696
19,163
5
30,634
17,000
6
34,197
16,868
7
33,845
14,840
8
35,043
13,658
9
36,604
12,681
10
36,914
11,368
11
31,450
8,609
12
31,450
7,652
13
31,450
6,802
14
31,450
6,046
15
31,450
5,374
16
31,450
4,777
17
31,450
4,246
18
31,450
3,775
19
31,450
3,355
20
31,450
2,982
Net Present Value
52,044
Required Rate of Return for Project =>
Reinvestment Rate for Project =>
Net Present Value
Modified IRR
Discounted Payback (years)

Payback
(128,117)
(119,599)
(107,152)
(87,989)
(70,990)
(54,121)
(39,282)
(25,624)
(12,943)
(1,575)
7,033 payback
14,686
21,488
27,534
32,908
37,686
41,932
45,707
49,062
52,044

12.50%
7.50%
$52,044
11.36%
11.18

Economic Assessment
Project has positive Net Present Value?
Project has IRR in excess of cost?
Project has a positive payback?

Yes
No
Yes

Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.

Risk Analysis
Risk Premium Applied to Project

3.00%

Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)
Exponential power to apply to Risk Ranking is 2 - (a)
Risk Factor = (b) raised to the power (c)
Probability of Accurate and Reliable Information for Project
Risk Ranking assigned to project (1 to 10)
Exponential power to apply to Project
Risk Factor for Project
Assign probabilities to three possible outcomes for project:
P Pesimistic outlook, declining growth, slower volumes, etc.
N Normal expected outlook as applied in analysis
O Optomistic outlook, better than expected growth
Total should equal
100.00%
Enter Expected Cash Flows for different outcomes:

Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Pesimist
8,650
6,800
7,900
8,600
8,100
7,500
7,100
6,200
6,000
5,500
5,100
4,900
4,250
3,705
3,250

Net Cash Flows
Normal
Optomist
14,494
26,800
10,779
27,500
17,723
33,200
30,696
37,800
30,634
43,900
34,197
42,100
33,845
41,850
35,043
40,950
36,604
40,200
36,914
39,900
31,450
37,750
31,450
35,950
31,450
34,150
31,450
32,990
31,450
31,650

Expected
Value
13,064
10,223
15,059
23,317
23,410
25,248
24,884
25,243
26,072
26,068
22,543
22,383
22,065
21,816
21,590

Standard
Deviation
(Abs Risk)
13,845
15,031
19,774
25,865
30,422
30,794
30,908
31,501
31,630
31,993
29,386
28,367
27,779
27,520
27,054

16
17
18
19
20
Totals

2,680
2,005
1,490
1,105
790
101,625

31,450
31,450
31,450
31,450
31,450
595,428

31,280
31,000
30,850
29,990
28,750
698,560

21,372
21,122
20,934
20,756
20,584
427,753

Absolute Risk of Project (Std Deviation)
Relative Risk of Project (Coeff of Variation)

27,349
27,806
28,197
27,986
27,454
540,660
540,660
1.264

Revised Economic Analysis using Expected Values
Expected
Values
0 (141,000)
1
13,064
2
10,223
3
15,059
4
23,317
5
23,410
6
25,248
7
24,884
8
25,243
9
26,072
10
26,068
11
22,543
12
22,383
13
22,065
14
21,816
15
21,590
16
21,372
17
21,122
18
20,934
19
20,756
20
20,584
Net Present Value
Year

Net Present Value
Modified IRR
Discounted Payback (years)

Present
Value
(141,000)
11,612
8,077
10,576
14,557
12,991
12,454
10,911
9,838
9,032
8,028
6,171
5,446
4,772
4,194
3,689
3,246
2,852
2,513
2,214
1,952
4,127
$4,127
9.68%
19.02

Recovery
Payback
(129,388)
(121,311)
(110,734)
(96,177)
(83,186)
(70,732)
(59,821)
(49,983)
(40,951)
(32,923)
(26,752)
(21,306)
(16,534)
(12,340)
(8,651)
(5,404)
(2,552)
(40)
2,175 payback
4,127

3
2
4
2
0
0

2
3
3
2
0
0

0
0
0
0
0

0
0
0
3
0
0

0
0
24

require additional
etween 15 and 20
20 may proceed

<= exclude since sunk cost, not relevant

h no salvage value.
od with no salvage value.

e negative impact to its
Year 3
(3,000)
1,200
(1,800)

Year 4
(1,500)
700
(800)

Year 5
(500)
100
(400)

Year
3
100,000

Year
4
125,000

Year
5
135,000

Year
6
140,000

Year
7
145,000

Year
8
149,000

Year
9
153,000

Year
10
155,000

Terminal
Flow
11 to 20
160,000

(22,000)
(15,000)
(30,000)
(1,800)
31,200
(8,580)
0
22,620

(25,000)
(18,000)
(32,000)
(800)
49,200
(13,530)
0
35,670

(30,000)
(19,000)
(35,000)
(400)
50,600
(13,915)
0
36,685

(32,000)
(15,000)
(36,000)
0
57,000
(15,675)
0
41,325

(35,000)
(15,000)
(37,000)
0
58,000
(15,950)
0
42,050

(36,000)
(15,000)
(37,000)
0
61,000
(16,775)
0
44,225

(36,500)
(15,000)
(37,000)
0
64,500
(17,738)
0
46,763

(37,000)
(15,000)
(37,000)
0
66,000
(18,150)
0
47,850

(40,000)
(18,000)
(40,000)
0
62,000
(17,050)
0
44,950

2,833

2,833

2,833

2,833

2,833

2,833

2,833

2,833

2,500

5,769
31,223
(10,000)
(3,500)
17,723

5,192
43,696
(12,500)
(500)
30,696

4,615
44,134
(13,500)
0
30,634

4,038
48,197
(14,000)
0
34,197

3,462
48,345
(14,500)
0
33,845

2,885
49,943
(14,900)
0
35,043

2,308
51,904
(15,300)
0
36,604

1,731
52,414
(15,500)
0
36,914

0
47,450
(16,000)
0
31,450

herwise special

sk) to Project Risk Factor:
1.00 (a)
1 (b)
1 (c)
1
0.5
7
1.5
19

35.00%
60.00%
5.00%
100.00%

Coeff of
Variation
(Rel Risk)
1.060
1.470
1.313
1.109
1.300
1.220
1.242
1.248
1.213
1.227
1.304
1.267
1.259
1.261
1.253

1.280
1.316
1.347
1.348
1.334
1.264

C

Capital Budgeting Analysis for
Medical Services USA
Upgrade to DuBois Center

Project Information
Project Description >
Upgrade DuBois for unused capacity
Project Benefits >
Better use of facility, more income
Project Location >
Iowa
Responsible Division >
Mid West
Responsible Department >
Finance
Contact Person Name >
Cheryl Strickland, Controller
Estimated Project Start Date >
03/15/92
Classification >
4
Justification >
C
Priority >
3
Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1
Project improves overall profitability of the company
F2
Project lowers cost structure
F3
Project will generate a rate of return
F4
Project improves asset utilization
F5
Other Financial Attribute __________________________________
F6
Other Financial Attribute __________________________________
Operating Attributes:
O1
Improves operating efficiencies
O2
Increases the customer base
O3
Improves overall customer service
O4
Improves competitive position of company
O5
Other Operating Attribute _________________________________
O6
Other Operating Attribute _________________________________
Contingency Attributes:
C1
Project has options that allow for change during life
C2
Project will positively impact company even if value is negative
C3
Project can be abandoned easily with some positive value
C4
Project permits several options to maximize value
C5
Other Cont Attribute _____________________________________
Miscellaneous Attributes:
M1
Expands Human Resource Capital
M2
Enhances workforce productivity
M3
Project meets a critical regulatory, security or specific need
M4
Project fits with company strategy and goals
M5
Probability of project success is very high / low risk
M6
Other Misc Attribute _____________________________________

M7
M8

Other Misc Attribute _____________________________________
Other Misc Attribute _____________________________________
Total Preliminary Points

Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Cost Volume Profile of DuBois Facility
Personnel & Labor
Supplies and Inventory
Variable Adm Overhead
Fixed Overhead Costs
Total Unit Costs per Billable Hour

37.50
2.65
3.60
10.50
54.25

Current Operating Capacity =>
60%
Maximum Capacity per month
15,000 billable hours
Sales growth rates over the next ten years are estimated at 4% per year with increases to costs
estimated at 1.5% per year for each variable component.
Estimated Changes from Upgrade Investment
Upgrade Investment will result in additional 5,000 billable hours per month
New Services from Upgrade Investment are billable to customers at $ 50.00 per hour
Capacity after upgrade =>
14,000
Does upgrade project exceed max?
No
Financial Analysis
Proposed Project Expenditure:
Upgrade Systems & Facilities
Executive Management Time
Training and Promotion
Contingency Costs
Total Investment
Project Analysis Required?

Year
1
2
3
4
5
6
7
8
9
10

1,150,000
405,000
135,000
90,000
1,780,000
Yes

Annual
< - - relevant annual costs to project - - >
Incremental Personnel
Supplies
Var Adm
Revenues
& Labor
& Inventory
Overhead
3,000,000
(2,250,000)
(159,000)
(216,000)
3,090,000
(2,283,750)
(161,385)
(219,240)
3,182,700
(2,318,006)
(163,806)
(222,529)
3,278,181
(2,352,776)
(166,263)
(225,867)
3,376,526
(2,388,068)
(168,757)
(229,255)
3,477,822
(2,423,889)
(171,288)
(232,693)
3,582,157
(2,460,247)
(173,857)
(236,184)
3,689,622
(2,497,151)
(176,465)
(239,727)
3,800,310
(2,534,608)
(179,112)
(243,322)
3,914,320
(2,572,627)
(181,799)
(246,972)

Profits
before Tax
375,000
425,625
478,359
533,275
590,447
649,952
711,868
776,279
843,267
912,921

Due to the rapid changes in services provided by this upgrade investment project, no
calculated for the periods beyond year 10.
Economic Analysis
Summarize Cash Outflows and Inflows for Project:
Cash
Present
Year
Flows
Value
0 (1,780,000) (1,780,000)
1
256,875
233,523
2
295,578
244,279
3
334,811
251,548
4
374,625
255,874
5
416,074
258,349
6
459,215
259,215
7
504,105
258,685
8
550,802
256,953
9
599,369
254,191
10
649,868
250,552
Net Present Value
743,170

Payback
(1,546,477)
(1,302,198)
(1,050,650)
(794,776)
(536,427)
(277,212)
(18,527)
238,427 payback
492,618
743,170

Required Rate of Return for Project =>
Reinvestment Rate for Project =>

10.00%
4.00%

Net Present Value
Modified IRR
Discounted Payback (years)

$743,170
11.24%
8.07

Economic Assessment
Project has positive Net Present Value?
Project has IRR in excess of cost?
Project has a positive payback?

Yes
Yes
Yes

Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.

Risk Analysis
Risk Premium Applied to Project

0.50%

Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)
Exponential power to apply to Risk Ranking is 2 - (a)
Risk Factor = (b) raised to the power (c)
Probability of Accurate and Reliable Information for Project
Risk Ranking assigned to project (1 to 10)
Exponential power to apply to Project
Risk Factor for Project

Assign probabilities to three possible outcomes for project:
P Pesimistic outlook, declining growth, slower volumes, etc.
N Normal expected outlook as applied in analysis
O Optomistic outlook, better than expected growth
Total should equal
100.00%
Enter Expected Cash Flows for different outcomes:

Year
1
2
3
4
5
6
7
8
9
10

Pesimist
212,500
242,500
301,200
326,700
370,900
411,800
461,900
510,200
561,300
615,100
4,014,100

Net Cash Flows
Normal
Optomist
256,875
285,700
295,578
324,300
334,811
362,050
374,625
401,200
416,074
441,300
459,215
483,700
504,105
533,100
550,802
582,200
599,369
631,100
649,868
677,700
4,441,320
4,722,350

Expected
Value
252,324
289,271
332,174
369,026
410,823
453,405
500,013
547,391
596,515
647,089
4,398,031

Absolute Risk of Project (Std Deviation)
Relative Risk of Project (Coeff of Variation)

Standard
Deviation
(Abs Risk)
54,978
62,301
44,892
56,638
53,493
54,949
53,239
53,323
51,374
46,230
531,419
531,419
0.121

Revised Economic Analysis using Expected Values
Expected
Values
0 (1,780,000)
1
252,324
2
289,271
3
332,174
4
369,026
5
410,823
6
453,405
7
500,013
8
547,391
9
596,515
10
647,089
Net Present Value
Year

Net Present Value
Modified IRR
Discounted Payback (years)

Present
Value
(1,780,000)
229,385
239,067
249,568
252,050
255,089
255,935
256,586
255,362
252,980
249,481
715,502
$715,502
11.12%
8.17

Recovery
Payback
(1,550,615)
(1,311,548)
(1,061,981)
(809,931)
(554,842)
(298,907)
(42,321)
213,041 payback
466,021
715,502

3
3
4
4
0
0

4
3
3
2
0
0

0
0
0
0
0

0
0
0
2
3
0

0
0
31

1.03
1.015

Less
Taxes
(103,125)
(117,047)
(131,549)
(146,651)
(162,373)
(178,737)
(195,764)
(213,477)
(231,898)
(251,053)

Project
Income
271,875
308,578
346,811
386,625
428,074
471,215
516,105
562,802
611,369
661,868

Adj to
Income
(15,000)
(13,000)
(12,000)
(12,000)
(12,000)
(12,000)
(12,000)
(12,000)
(12,000)
(12,000)

Cash
Flow
256,875
295,578
334,811
374,625
416,074
459,215
504,105
550,802
599,369
649,868

de investment project, no terminal value was

oject Risk Factor:
1.00 (a)
1 (b)
1 (c)
1
0.7
4
1.3
6

20.00%
65.00%
15.00%
100.00%

Coeff of
Variation
(Rel Risk)
0.218
0.215
0.135
0.153
0.130
0.121
0.106
0.097
0.086
0.071
0.121

D

Capital Budgeting Analysis for
Medical Services USA
Southeastern Upgrades

Project Information
Project Description >
Upgrade to various Southeastern facilities
Project Benefits >
Better use of facility, more income
Project Location >
Atlanta
Responsible Division >
Southeast
Responsible Department >
Engineering
Contact Person Name >
Bob Ferrell
Estimated Project Start Date >
02/05/92
Classification >
4
Justification >
C
Priority >
3
Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1
Project improves overall profitability of the company
F2
Project lowers cost structure
F3
Project will generate a rate of return
F4
Project improves asset utilization
F5
Other Financial Attribute __________________________________
F6
Other Financial Attribute __________________________________
Operating Attributes:
O1
Improves operating efficiencies
O2
Increases the customer base
O3
Improves overall customer service
O4
Improves competitive position of company
O5
Other Operating Attribute _________________________________
O6
Other Operating Attribute _________________________________
Contingency Attributes:
C1
Project has options that allow for change during life
C2
Project will positively impact company even if value is negative
C3
Project can be abandoned easily with some positive value
C4
Project permits several options to maximize value
C5
Other Cont Attribute _____________________________________
Miscellaneous Attributes:
M1
Expands Human Resource Capital
M2
Enhances workforce productivity

M3
M4
M5
M6
M7
M8

Project meets a critical regulatory, security or specific need
Project fits with company strategy and goals
Probability of project success is very high / low risk
Other Misc Attribute _____________________________________
Other Misc Attribute _____________________________________
Other Misc Attribute _____________________________________
Total Preliminary Points

Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Project Summary
Several facilities in the Southeast area need to upgrade existing scanner equipment to better serve customers
and produce higher quality analysis / treatments. The Atlanta Bank has agreed to finance $ 500,000 towards
the investment at 9% over a five year period. The loan repayment schedule is as follows:
Interest Number of
Rate
Installments
0.09
5

Year
1
2
3
4
5

Loan
Balance
500,000
416,454
325,388
226,127
117,932

Interest
Payment
(45,000)
(37,481)
(29,285)
(20,351)
(10,614)

Principal
Payment
(83,546)
(91,065)
(99,261)
(108,195)
(117,932)

Total
Payment
(128,546)
(128,546)
(128,546)
(128,546)
(128,546)

Financial Analysis
Proposed Project Expenditure:
Total Upgrade Acquisition Price
Installation / Training / Other Costs
Total Investment
Financed through Bank
Net Cash Outlay
Project Analysis Required?

1,650,000 (1)
65,000
1,715,000
(500,000)
1,215,000
Yes

(1): $ 650,000 of this price is subject to capitalization. Depreciation deducted on the tax return
differs from depreciation for accounting purposes:
Tax Return
Accounting
Year
Depreciation Depreciation
1
325,000
65,000
2
162,500
65,000
3
81,250
65,000
4
40,625
65,000
5
40,625
65,000
6
65,000
7
65,000
8
65,000

9
10
650,000

65,000
65,000
650,000

Cash Flow Analysis #1 - Only Project Cash Flows
Service
Other
Depreciation
Year
Revenues
Costs
Costs
Deduction
1
535,800
(112,000)
(38,000)
(325,000)
2
585,900
(155,100)
(46,500)
(162,500)
3
612,600
(188,600)
(54,100)
(81,250)
4
636,050
(202,900)
(63,200)
(40,625)
5
644,112
(224,200)
(68,900)
(40,625)
6
653,500
(241,600)
(72,110)
7
668,200
(258,800)
(77,800)
8
677,400
(272,100)
(83,100)
9
689,800
(287,800)
(88,900)
10
705,300
(298,400)
(94,200)
11
712,900
(309,100)
(97,800)
12
719,600
(319,400)
(101,050)
13
722,800
(325,400)
(104,900)
14
729,100
(329,900)
(107,800)
15
734,300
(334,100)
(110,100)

Taxable
Income
60,800
221,800
288,650
329,325
310,387
339,790
331,600
322,200
313,100
312,700
306,000
299,150
292,500
291,400
290,100

Total

Economic Analysis #1
Year

Cash Flow
0 (1,215,000)
1
339,580
2
290,205
3
254,921
4
241,486
5
227,256
6
207,148
7
200,010
8
192,395
9
185,098
10
184,408
11
179,050
12
173,284
13
167,963
14
166,665
15
165,223
Net Present Value

Present
Value
(1,215,000)
303,875
232,386
182,668
154,846
130,400
106,364
91,901
79,107
68,104
60,716
52,754
45,686
39,627
35,187
31,214
399,835

Payback
(911,125)
(678,739)
(496,071)
(341,225)
(210,825)
(104,461)
(12,560)
66,547
134,651
195,367
248,120
293,807
333,434
368,621
399,835

Required Rate of Return for Project =>
Reinvestment Rate for Project =>
Net Present Value
Modified IRR
Discounted Payback (years)

payback

11.75%
4.50%
$399,835
9.25%
8.16

Cash Flow Analysis #2 - Include Financing Flows / Discount Rate = Cost of Borrowing:
Service
Other
Taxable
Less
Year
Revenues
Costs
Costs
Income
Taxes
1
535,800
(112,000)
(38,000)
385,800
(106,095)
2
585,900
(155,100)
(46,500)
384,300
(105,683)
3
612,600
(188,600)
(54,100)
369,900
(101,723)
4
636,050
(202,900)
(63,200)
369,950
(101,736)
5
644,112
(224,200)
(68,900)
351,012
(96,528)
6
653,500
(241,600)
(72,110)
339,790
(93,442)
7
668,200
(258,800)
(77,800)
331,600
(91,190)
8
677,400
(272,100)
(83,100)
322,200
(88,605)
9
689,800
(287,800)
(88,900)
313,100
(86,103)
10
705,300
(298,400)
(94,200)
312,700
(85,993)
11
712,900
(309,100)
(97,800)
306,000
(84,150)
12
719,600
(319,400)
(101,050)
299,150
(82,266)
13
722,800
(325,400)
(104,900)
292,500
(80,438)
14
729,100
(329,900)
(107,800)
291,400
(80,135)
15
734,300
(334,100)
(110,100)
290,100
(79,778)
Economic Analysis #2
Year

Cash Flow
0 (1,215,000)
1
223,409
2
171,966
3
134,428
4
118,536
5
101,628
6
207,148
7
200,010
8
192,395
9
185,098
10
184,408
11
179,050
12
173,284
13
167,963
14
166,665
15
165,223
Net Present Value

Present
Value
(1,215,000)
209,724
151,544
111,208
92,054
74,089
141,766
128,496
116,033
104,794
98,008
89,332
81,159
73,849
68,790
64,017
389,865

Payback
(1,005,276)
(853,731)
(742,523)
(650,469)
(576,380)
(434,614)
(306,118)
(190,085)
(85,291)
12,718 payback
102,050
183,209
257,058
325,848
389,865

After Tax Cost of Borrowing =>
Reinvestment Rate for Project =>
Net Present Value
Modified IRR
Discounted Payback (years)

6.53%
2.50%
$389,865
6.38%
10.87

Economic Assessment (based on Analysis #1)
Project has positive Net Present Value?
Project has IRR in excess of cost?
Project has a positive payback?

Yes
No
Yes

Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.

Risk Analysis (based on analysis #1)
Risk Premium Applied to Project

2.25%

Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)
Exponential power to apply to Risk Ranking is 2 - (a)
Risk Factor = (b) raised to the power (c)
Probability of Accurate and Reliable Information for Project
Risk Ranking assigned to project (1 to 10)
Exponential power to apply to Project
Risk Factor for Project

1.00
1
1
1
0.65
6
1.35
11

Assign probabilities to three possible outcomes for project:
P Pesimistic outlook, declining growth, slower volumes, etc.
N Normal expected outlook as applied in analysis
O Optomistic outlook, better than expected growth
Total should equal
100.00%

10.00%
70.00%
20.00%
100.00%

Enter Expected Cash Flows for different outcomes:

Year
1
2
3
4
5
6
7
8
9
10
11
12
13

Pesimist
321,100
271,600
237,200
224,850
211,800
190,450
184,100
176,350
169,150
168,340
163,100
158,350
153,300

Net Cash Flows
Normal
Optomist
339,580
361,200
290,205
311,950
254,921
276,705
241,486
261,890
227,256
248,605
207,148
227,690
200,010
220,280
192,395
211,650
185,098
204,880
184,408
203,090
179,050
197,450
173,284
192,770
167,963
185,200

Expected
Value
342,056
292,694
257,506
243,903
229,980
209,586
202,473
194,642
187,459
186,537
181,135
175,688
169,944

Standard
Deviation
(Abs Risk)
30,106
30,291
29,762
27,901
27,951
28,057
27,325
26,549
26,935
26,078
25,763
26,038
23,958

Coeff of
Variation
(Rel Risk)
0.088
0.103
0.116
0.114
0.122
0.134
0.135
0.136
0.144
0.140
0.142
0.148
0.141

14
15
Totals

152,820
152,650
2,935,160

166,665
165,223
3,174,689

183,990
183,690
3,471,040

168,746
167,659
3,210,006

23,512
23,671
403,897

Absolute Risk of Project (Std Deviation)
Relative Risk of Project (Coeff of Variation)

0.139
0.141
0.126
403,897
0.126

Revised Economic Analysis using Expected Values
Expected
Values
0
(1,215,000)
1
342,056
2
292,694
3
257,506
4
243,903
5
229,980
6
209,586
7
202,473
8
194,642
9
187,459
10
186,537
11
181,135
12
175,688
13
169,944
14
168,746
15
167,659
Net Present Value
Year

Net Present Value
Modified IRR
Discounted Payback (years)

Present
Value
(1,215,000)
306,090
234,379
184,520
156,396
131,963
107,616
93,032
80,030
68,973
61,417
53,368
46,320
40,095
35,626
31,675
416,502
$416,502
9.33%
8.01

Recovery
Payback
(908,910)
(674,531)
(490,011)
(333,614)
(201,651)
(94,035)
(1,002)
79,028 payback
148,001
209,418
262,786
309,106
349,201
384,827
416,502

2
2
4
5
0
0

5
1
2
3
0
0

0
1
1
0
0

0
2

0
2
2
0
0
0
32

better serve customers
ce $ 500,000 towards

Tax Benefit
of Interest
12,375
10,307
8,053
5,597
2,919

on the tax return
Tax Benefit
Depreciation
89,375
44,688
22,344
11,172
11,172

Less
Taxes
(16,720)
(60,995)
(79,379)
(90,564)
(85,356)
(93,442)
(91,190)
(88,605)
(86,103)
(85,993)
(84,150)
(82,266)
(80,438)
(80,135)
(79,778)

Net
Add Back
Income
Depreciation
44,080
325,000
160,805
162,500
209,271
81,250
238,761
40,625
225,031
40,625
246,348
240,410
233,595
226,998
226,708
221,850
216,884
212,063
211,265
210,323

Working
Capital
(29,500)
(33,100)
(35,600)
(37,900)
(38,400)
(39,200)
(40,400)
(41,200)
(41,900)
(42,300)
(42,800)
(43,600)
(44,100)
(44,600)
(45,100)

Cash
Flow
339,580
290,205
254,921
241,486
227,256
207,148
200,010
192,395
185,098
184,408
179,050
173,284
167,963
166,665
165,223

Net
Tax Benefit Tax Benefit
Income
Depreciation
Interest
279,705
89,375
12,375
278,618
44,688
10,307
268,178
22,344
8,053
268,214
11,172
5,597
254,484
11,172
2,919
246,348
240,410
233,595
226,998
226,708
221,850
216,884
212,063
211,265
210,323

Loan
Payment
(128,546)
(128,546)
(128,546)
(128,546)
(128,546)

Working
Capital
(29,500)
(33,100)
(35,600)
(37,900)
(38,400)
(39,200)
(40,400)
(41,200)
(41,900)
(42,300)
(42,800)
(43,600)
(44,100)
(44,600)
(45,100)

Cash
Flow
223,409
171,966
134,428
118,536
101,628
207,148
200,010
192,395
185,098
184,408
179,050
173,284
167,963
166,665
165,223

(a)
(b)
(c)

E

Capital Budgeting Analysis for
Medical Services USA
Canadian Partnership

Project Information
Project Description > Expand Toronto Urban Centers
Project Benefits >
Market expansion, new source of revenues, leverage of assets
Project Location >
Toronto
Responsible Division >
Canadian Division
Responsible Department >
Marketing
Contact Person Name >
Allen J. Herbert
Estimated Project Start Date >
04/01/92
Classification >
8
Justification >
C
Priority >
3
Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1
Project improves overall profitability of the company
F2
Project lowers cost structure
F3
Project will generate a rate of return
F4
Project improves asset utilization
F5
Other Financial Attribute __________________________________
F6
Other Financial Attribute __________________________________
Operating Attributes:
O1
Improves operating efficiencies
O2
Increases the customer base
O3
Improves overall customer service
O4
Improves competitive position of company
O5
Other Operating Attribute _________________________________
O6
Other Operating Attribute _________________________________
Contingency Attributes:
C1
Project has options that allow for change during life
C2
Project will positively impact company even if value is negative
C3
Project can be abandoned easily with some positive value
C4
Project permits several options to maximize value
C5
Other Cont Attribute _____________________________________
Miscellaneous Attributes:
M1
Expands Human Resource Capital
M2
Enhances workforce productivity

M3
M4
M5
M6
M7
M8

Project meets a critical regulatory, security or specific need
Project fits with company strategy and goals
Probability of project success is very high / low risk
Other Misc Attribute _____________________________________
Other Misc Attribute _____________________________________
Other Misc Attribute _____________________________________
Total Preliminary Points

Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Project Summary
In order to establish a toehold position in the Toronto area, a joint venture investment will be
made since the current major provider in Toronto needs improved child care services for the
urban areas of Toronto. Medical Services USA will provide personnel and overall management
for urban child care. In return, Medical Services USA will share in the profits 50% / 50%. The Joint
Venture Agreement has a ten year term period.
Financial Analysis (all amounts are expressed in Canadian Dollars)
Convert
to U.S.$ *
Initial Relocation / Setup Costs
$750,000
1.12

$840,000

Ten Year Projected Income Statement
Year
1 **
2
3
4
5
6
7
8
9
10

Sales
(100%)
637,500
895,000
912,000
942,000
977,000
1,015,000
1,045,000
1,088,000
1,135,000
1,180,000

Cost of
Service
270,000
366,000
377,000
378,000
370,000
368,000
362,000
355,000
350,000
348,000

Income
before Tax
367,500
529,000
535,000
564,000
607,000
647,000
683,000
733,000
785,000
832,000

Less
Taxes
79,500
119,000
101,000
104,000
112,000
129,000
140,000
138,000
151,000
157,000

* convert from Canadian Dollars to U.S. Dollars
** partial year in 1992
Economic Analysis (U.S. Dollars)
Summarize Cash Outflows and Inflows for Project:
Cash
Present

Net
Income
288,000
410,000
434,000
460,000
495,000
518,000
543,000
595,000
634,000
675,000

Adj to
Cash
Flow
42,000
82,000
55,000
68,000
88,000
90,000
110,000
115,000
122,000
135,000

Year

Flows
0
(840,000)
1
189,750
2
290,280
3
295,845
4
316,800
5
341,055
6
355,680
7
382,005
8
415,350
9
442,260
10
473,850
Net Present Value

Value
(840,000)
167,181
225,333
202,338
190,898
181,069
166,374
157,434
150,816
141,486
133,562
876,491

Payback
(672,819)
(447,486)
(245,148)
(54,250)
126,819
293,193
450,626
601,442
742,929
876,491

Required Rate of Return for Project =>
Reinvestment Rate for Project =>

13.50%
3.50%

Net Present Value
Modified IRR
Discounted Payback (years)

$876,491
16.95%
5.30

Economic Assessment
Project has positive Net Present Value?
Project has IRR in excess of cost?
Project has a positive payback?

Yes
Yes
Yes

Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.

Risk Analysis
Risk Premium Applied to Project

4.00%

Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)
Exponential power to apply to Risk Ranking is 2 - (a)
Risk Factor = (b) raised to the power (c)
Probability of Accurate and Reliable Information for Project
Risk Ranking assigned to project (1 to 10)
Exponential power to apply to Project
Risk Factor for Project
Assign probabilities to three possible outcomes for project:
P Pesimistic outlook, declining growth, slower volumes, etc.
N Normal expected outlook as applied in analysis

O Optomistic outlook, better than expected growth
Total should equal
100.00%
Enter Expected Cash Flows for different outcomes:

Year
1
2
3
4
5
6
7
8
9
10

Net Cash Flows
Pesimist
Normal
Optomist
132,000
189,750
198,500
227,300
290,280
311,100
239,100
295,845
315,200
244,050
316,800
340,500
267,800
341,055
368,500
285,200
355,680
387,500
307,900
382,005
416,900
329,100
415,350
460,900
363,300
442,260
484,800
380,050
473,850
517,100
2,775,800
3,502,875 3,801,000

Expected
Value
177,500
279,740
286,498
304,538
329,603
346,015
372,203
405,175
433,155
461,213
3,395,638

Absolute Risk of Project (Std Deviation)
Relative Risk of Project (Coeff of Variation)

800,754
0.236

Revised Economic Analysis using Expected Values
Expected
Values
0
(840,000)
1
177,500
2
279,740
3
286,498
4
304,538
5
329,603
6
346,015
7
372,203
8
405,175
9
433,155
10
461,213
Net Present Value
Year

Net Present Value
Modified IRR
Discounted Payback (years)

Present
Value
(840,000)
156,388
217,152
195,945
183,509
174,989
161,853
153,394
147,121
138,574
130,000
818,923
$818,923
16.58%
5.50

Standard
Deviation
(Abs Risk)
55,685
66,708
60,421
76,871
79,304
79,171
84,006
100,391
92,352
105,845
800,754

Recovery
Payback
(683,612)
(466,461)
(270,516)
(87,007)
87,982
249,835
403,228
550,350
688,923
818,923

3
2
4
4
0
0

1
4
4
3
0
0

0
2
0
0
0

0
0

0
3
2
0
0
0
32

management
/ 50%. The Joint

Estimated
Cash
Flow
330,000
492,000
489,000
528,000
583,000
608,000
653,000
710,000
756,000
810,000

50%
Convert
Share to U.S.$ *
165,000
1.15
246,000
1.18
244,500
1.21
264,000
1.20
291,500
1.17
304,000
1.17
326,500
1.17
355,000
1.17
378,000
1.17
405,000
1.17

189,750
290,280
295,845
316,800
341,055
355,680
382,005
415,350
442,260
473,850

Project Risk Factor:
1.00 (a)
1 (b)
1 (c)
1
0.6
6
1.4
12

25.00%
50.00%

25.00%
100.00%

Coeff of
Variation
(Rel Risk)
0.314
0.238
0.211
0.252
0.241
0.229
0.226
0.248
0.213
0.229
0.236

F

Capital Budgeting Analysis for
Medical Services USA
Regulatory Compliance NE

Project Information
Project Description >
Regulatory Compliance in NE
Project Benefits >
Compliance
Project Location >
Northeast Regional Office - Boston, MA
Responsible Division >
Finance
Responsible Department >
Finance
Contact Person Name >
Carl Jackson, V.P. Finance
Estimated Project Start Date >
01/01/92
Classification >
9
Justification >
E
Priority >
2

Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1
Project improves overall profitability of the company
F2
Project lowers cost structure
F3
Project will generate a rate of return
F4
Project improves asset utilization
F5
Other Financial Attribute __________________________________
F6
Other Financial Attribute __________________________________
Operating Attributes:
O1
Improves operating efficiencies
O2
Increases the customer base
O3
Improves overall customer service
O4
Improves competitive position of company
O5
Other Operating Attribute _________________________________
O6
Other Operating Attribute _________________________________
Contingency Attributes:
C1
Project has options that allow for change during life
C2
Project will positively impact company even if value is negative
C3
Project can be abandoned easily with some positive value
C4
Project permits several options to maximize value
C5
Other Cont Attribute _____________________________________
Miscellaneous Attributes:
M1
Expands Human Resource Capital

M2
M3
M4
M5
M6
M7
M8

Enhances workforce productivity
Project meets a critical regulatory, security or specific need
Project fits with company strategy and goals
Probability of project success is very high / low risk
Other Misc Attribute _____________________________________
Other Misc Attribute _____________________________________
Other Misc Attribute _____________________________________
Total Preliminary Points

Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Project Summary
A major regulatory change is expected to change certain services in the Northeastern United States.
In order to meet this new mandate, an investment is required in field personnel, training, and
equipment. Revenues from the new services are also forecasted based on demand in California
which adopted this regulatory change two years ago. The regulatory change is subject to future
modification and therefore, the project is only projected over two years on a month to month basis.
There is no initial investment required for this project.
Economic Analysis (Cash Flows by Month)

Date
1
2
3
4
5
6
7
8
9
10
11
12
1992 Total
13
14
15
16
17
18
19

31-Jan-92
28-Feb-92
31-Mar-92
30-Apr-92
31-May-92
30-Jun-92
31-Jul-92
31-Aug-92
30-Sep-92
31-Oct-92
30-Nov-92
31-Dec-92
31-Jan-93
28-Feb-93
31-Mar-93
30-Apr-93
31-May-93
30-Jun-93
31-Jul-93

Monthly
Period
Revenues
35,200
39,400
41,000
42,550
43,990
44,550
45,100
46,990
47,800
48,650
49,280
48,300
532,810
47,100
45,500
44,100
42,400
41,000
39,100
38,500

Setup
Costs

Service
Costs

Misc /
Taxes

-16,000
-5,000
-3,500
-1,500
-1,500
-2,000

-3,500
-3,500
-3,500
-4,000
-4,000
-4,000
-4,500
-4,500
-4,500
-5,100
-5,100
-5,100

-2,500
-2,000
-2,000
-1,750
-1,750
-1,750
-1,650
-1,650
-1,650
-1,500
-1,500
-1,500

-10,000
-2,000

-5,800
-5,800
-5,800
-6,200
-6,200
-6,200
-6,750

-1,350
-1,350
-1,350
-1,275
-1,275
-1,275
-1,205

Total
Outflows
-22,000
-10,500
-9,000
-7,250
-7,250
-7,750
-6,150
-6,150
-6,150
-6,600
-6,600
-6,600
-102,000
-17,150
-9,150
-7,150
-7,475
-7,475
-7,475
-7,955

Net Cash
Flow
13,200
28,900
32,000
35,300
36,740
36,800
38,950
40,840
41,650
42,050
42,680
41,700
29,950
36,350
36,950
34,925
33,525
31,625
30,545

20
21
22
23
24
1993 Total
Total

31-Aug-93
30-Sep-93
31-Oct-93
30-Nov-93
31-Dec-93

37,900
37,100
36,800
36,400
36,000
481,900
1,014,710

-5,000

-6,750
-6,750
-7,000
-7,000
-7,000

-1,205
-1,205
-1,170
-1,170
-1,170

-7,955
-7,955
-8,170
-8,170
-13,170
-109,250
-211,250

29,945
29,145
28,630
28,230
22,830

Annual
6.50%

Required Rate of Return for Project =>
Net Present Value
Rate of Return (IRR Annual Basis)
Discounted Payback

Immediate

Economic Assessment
Project has positive Net Present Value?
Project has IRR in excess of cost?
Project has a positive payback?

Yes
Yes
Yes

Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.

Risk Analysis
Risk Premium Applied to Project

0.00% (Required for Compliance)

Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)
Exponential power to apply to Risk Ranking is 2 - (a)
Risk Factor = (b) raised to the power (c)
Probability of Accurate and Reliable Information for Project
Risk Ranking assigned to project (1 to 10)
Exponential power to apply to Project
Risk Factor for Project
Assign probabilities to three possible outcomes for project:
P Pesimistic outlook, declining growth, slower volumes, etc.
N Normal expected outlook as applied in analysis
O Optomistic outlook, better than expected growth
Total should equal
100.00%
Enter Expected Cash Flows for different outcomes:

Month
1
2
3
4
5
6
7
8
9
10
11
12

Net Cash Flows
Pesimist
Normal
Optomist
12,050
13,129
13,700
26,200
28,589
29,900
28,830
31,486
32,920
31,390
34,545
36,050
32,710
35,761
37,430
32,600
35,626
37,250
34,170
37,505
39,250
35,870
39,113
40,900
36,275
39,673
41,470
36,510
39,839
41,680
36,810
40,218
42,050
35,860
39,083
40,920

Annual Sub Total
13
14
15
16
17
18
19
20
21
22
23
24

25,620
30,850
31,170
29,350
27,960
26,300
25,120
24,470
23,690
23,150
22,660
18,230

27,919
33,702
34,074
32,033
30,583
28,695
27,565
26,878
26,019
25,422
24,932
20,054

29,200
35,240
35,630
33,510
31,920
30,010
28,850
28,140
27,300
26,700
26,200
21,100

687,845

752,443

787,320

Annual Sub Total

Standard
Expected
Deviation
Value
(Abs Risk)
13,081
1,200
28,493
2,684
31,374
2,971
34,373
3,417
35,637
3,425
35,497
3,379
37,354
3,699
38,984
3,648
39,523
3,780
39,708
3,748
40,073
3,808
38,967
3,660
413,063
27,830
2,594
33,582
3,189
33,950
3,242
31,926
3,017
30,457
2,889
28,599
2,691
27,456
2,715
26,769
2,672
25,926
2,619
25,337
2,570
24,845
2,565
19,990
2,075
336,665
749,729
72,259

Absolute Risk of Project (Std Deviation)
Relative Risk of Project (Coeff of Variation)

Revised Economic Analysis using Expected Values

Dates
1
2
3
4
5
6
7
8
9
10
11

Expected
Values
13,129
28,589
31,486
34,545
35,761
35,626
37,505
39,113
39,673
39,839
40,218

Present
Value
13,058
28,282
30,979
33,807
34,808
34,490
36,113
37,458
37,791
37,744
37,898

72,259
0.096

12
39,083
13
27,919
14
33,702
15
34,074
16
32,033
17
30,583
18
28,695
19
27,565
20
26,878
21
26,019
22
25,422
23
24,932
24
20,054
Net Present Value
Net Present Value
Rate of Return (IRR Annual Basis)
Discounted Payback

36,629
26,025
31,247
31,422
29,381
27,900
26,036
24,876
24,126
23,229
22,573
22,019
17,615
705,507

Immediate

$705,507
298.86%
0

2
3
4
3
0
0

2
3
3
2
0
0

3
1
0
0
0

0

0
5
2
1
0
0
0
34

n United States.
in California

o month basis.

Present
Present
Value
Value
(simple calc) (functional)
13,129
13,129
28,589
28,590
31,486
31,488
34,545
34,551
35,761
35,771
35,626
35,642
37,505
37,527
39,113
39,144
39,673
39,714
39,839
39,889
40,218
40,280
39,083
39,155
27,919
33,702
34,074
32,033
30,583
28,695
27,565

27,980
33,788
34,173
32,140
30,698
28,815
27,695

26,878
26,019
25,422
24,932
20,054

27,018
26,168
25,582
25,103
20,204

752,443

754,244

Monthly
0.54%
752,443
419%
0

Calculate IRR (annual basis):
Annual
Outflow
-102,000
-109,250

rwise special

Compliance)

) to Project Risk Factor:
1.00 (a)
1 (b)
1 (c)
1
0.75
4
1.25
6

15.00%
65.00%
20.00%
100.00%

Annual
Inflow
532,810
481,900

Coeff of
Variation
(Rel Risk)
0.092
0.094
0.095
0.099
0.096
0.095
0.099
0.094
0.096
0.094
0.095
0.094
0.093
0.095
0.095
0.095
0.095
0.094
0.099
0.100
0.101
0.101
0.103
0.104
0.096

Adjusted
Inflows

Adjusted
Outflows

Calculate IRR (annual basis):
Annual
Outflow
-102,000
-109,250

Annual
Inflow
413,063
336,665

Capital Budgeting Analysis for
Medical Services USA
Summarize Economic and Risk Analysis for All Projects
Project
Ref
A
B
C
D
E
F

Project Name
Diesel Generation System
New Clinic in Kansas City
Upgrade to DuBois Center
Southeastern Upgrades
Expand Toronto Urban Centers
Regulatory Compliance in NE

Required
Investment

Preliminary
Points

$182,080
$141,000
$1,780,000
$1,215,000
$840,000
$0

Justification
Code

27
24
31
32
32
34

Priority
Code

F
C
C
C
C
E

2
3
3
3
3
2

* Provide additional narrative information on "strategic" reasons for making this investment since the return is less th

Using Solver for Program Constraints

Financial Modeling Textbooks provide useful examples of how Excel Solver can be used to solve for capital budgeti
set of constraints. The following example will illustrate how we could apply Solver for finding the right set of projects
Example:
Objective: Maximize Net Present Value of Projects
Contraints: Year 1: Only $ 200,000 can be spent on all capital projects
Year 2: Only $ 150,000 can be spent on all capital projects
Year 3: Only $ 120,000 can be spent on all capital projects
Year 4: Only $ 100,000 can be spent on all capital projects
Year 5: Only $ 75,000 can be spent on all capital projects
Five Projects require investments over five years and have the following Net Present Values:
Select?
Project 0 = No
Ref
1 = Yes
A
B
C
D
E

1
0
1
1
0

Project Name
Annual Marketing Program
IT Infrastructure Development
Executive Leadership
HR Capital Improvement
Product Research
Total (SumProduct)
Maximum Allowed Budget

NPV
650,000
820,000
540,000
701,000
490,000
1,806,385

< - - - - - Five Year Capital Budgets for Each Project - Year 1
Year 2
Year 3
45,000
55,000
25,000
35,000
50,000
99,051
200,000

40,000
60,000
20,000
30,000
45,000
85,282
150,000

We will enter the following constraints into Solver:
$ 45,000 A + $ 55,000 B + $ 25,000 C + $ 35,000 D + $ 50,000 E .LE. $ 200,000
$ 40,000 A + $ 60,000 B + $ 20,000 C + $ 30,000 D + $ 45,000 E .LE. $ 150,000
$ 38,000 A + $ 60,000 B + $ 20,000 C + $ 30,000 D + $ 42,000 E .LE. $ 120,000

38,000
60,000
20,000
30,000
42,000
83,672
120,000

$ 35,000 A + $ 58,000 B + $ 18,000 C + $ 28,000 D + $ 40,000 E .LE. $ 100,000
$ 35,000 A + $ 55,000 B + $ 17,000 C + $ 27,000 D + $ 40,000 E .LE. $ 75,000
Each of the above constraints recognizes that we can spend no more than what is budgeted each year. We also
have the equation we are trying to solve for:
Maximize NPV = $ 650,000 A + $ 820,000 B + $ 540,000 C + $ 701,000 D + $ 490,000 E
We will also use as our variables "0" for No and "1" for Yes as to which projects we should select given the above
constraints and equation. The "maximum" NPV will show up in our "set" cell which is cell D43.
Now go to the main toolbar, select Tools -> Solver and enter the following:
1. Target Cell is D43
2. Equal to: Select the Max button since we are solving for maximum values.
3. By Changing Cells: Select the range B38:B42 as our variables.
4. Subject to Constraints: Add two contraints as follows:
B38:B42 .EQ. Binary
EQ or = (equal)
E43:I43 .LE. E44:I44
LE or <= (less than or equal to)
5. Click on Solve. The Find Solution dialog box may pop up. Click on Answer. Solver will change the variables
(which we first entered all as zero's in cells B38:B42) and produce a report (Answer Report 1)
Using Excel Solver, we would select Projects A, C, and D!

Project
Value
$34,761
$4,127
$715,502
$416,502
$818,923
$705,507

9.50% <= weighted average cost of capital
rate of return is less than weighted average cost of capital *
(years)
Rate of
Payback
Risk
Relative
Absolute
Return
Period
Factor
Risk
Risk
10.07%
9.68%
11.12%
9.33%
16.58%
298.86%

6.6
19.0
8.2
8.0
5.5
0.0

9.5
18.5
6.1
11.2
12.3
5.7

ent since the return is less than the cost of investments (cost of capital).

d to solve for capital budgeting program decisions given a
ding the right set of projects given a set of contraints:

Budgets for Each Project - - - - - >
Year 4
Year 5
35,000
58,000
18,000
28,000
40,000
77,154
100,000

35,000
55,000
17,000
27,000
40,000
75,000
75,000

LE: Less than or Equal to

0.52
1.26
0.12
0.13
0.24
0.10

$164,674
$540,660
$531,419
$403,897
$800,754
$72,259

eted each year. We also

uld select given the above

change the variables

Microsoft Excel 9.0 Answer Report
Worksheet: [CBAnalysis.xls]Summary
Report Created: 2/26/2003 9:58:29 AM

Target Cell (Max)
Cell
Name
$D$43 Total (SumProduct) NPV

Original Value
0

Final Value
1,806,385

Adjustable Cells
Cell
Name
$B$38 A 1 = Yes
$B$39 B 1 = Yes
$B$40 C 1 = Yes
$B$41 D 1 = Yes
$B$42 E 1 = Yes

Original Value
0
0
0
0
0

Final Value

Constraints
Cell
Name
$E$43 Total (SumProduct) Year 1
$F$43 Total (SumProduct) Year 2
$G$43 Total (SumProduct) Year 3
$H$43 Total (SumProduct) Year 4
$I$43 Total (SumProduct) Year 5
$B$38 A 1 = Yes
$B$39 B 1 = Yes
$B$40 C 1 = Yes
$B$41 D 1 = Yes
$B$42 E 1 = Yes

1
0
1
1
0

Cell Value
Formula
99,051 $E$43<=$E$44
85,282 $F$43<=$F$44
83,672 $G$43<=$G$44
77,154 $H$43<=$H$44
75,000 $I$43<=$I$44
1 $B$38=binary
0 $B$39=binary
1 $B$40=binary
1 $B$41=binary
0 $B$42=binary

Status
Slack
Not Binding 100948.69532
Not Binding 64717.944603
Not Binding 36328.20554
Not Binding 22846.158167
Binding
0
Binding
0
Binding
0
Binding
0
Binding
0
Binding
0