Start by reading and following these instructions:

1. Quickly skim the questions or assignment below and the assignment rubric to help you focus.

2. Read the required chapter(s) of the textbook and any additional recommended resources. Some answers may require you to do additional research on the Internet or in other reference sources. Choose your sources carefully.

3. Consider the discussions and any insights gained from it.

4. Create your Assignment submission and be sure to cite your sources, use APA style as required, check your spelling.

Assignment:

Assignment Part 1: You are deciding between two investments in the healthcare field. Each investment is projected to produce the following cash flows:

Investment OneYearCash0-$150,0001$10,0002$8,0003$25,0004$50,0005$25,0006$50,000Investment TwoYearCash0-$100,000102030405$54,0006$65,000Assume a discount rate of 5%. Which investment would you prefer? Why?

Assignment Part 2: How would your analysis change if you assumed 3% inflation per year?

Assignment Part 3: If investment one was riskier than investment two, how would your calculations change so that additional risk is taken into account? Also, does this new information change your project preference?

Present your findings in the form of a spreadsheet, and include a three-page written report describing your findings, assumptions, and rationale. Make sure to reference any citations using the APA writing style for the essay. The cover page and reference page do not count towards the minimum word amount.

Assignment Expectations:

Length:

Spreadsheet,

750 – 1000 written words; answers must thoroughly address the questions in a clear, concise manner

Structure:

Include a title page and reference page in APA style. Separate each section in your paper with a clear heading that allows your professor to know which bullet you are addressing in that section of your paper. Support your ideas with at least three (3) citations in your essay. Make sure to reference the citations using the APA writing style for the essay. The cover page and reference page do not count towards the minimum word amount.

References:

Include the appropriate APA style in-text citations and references for all resources utilized to answer the questions

Format:

save your assignment as a Microsoft Word (.doc or .docx), Open Office (.odt) or rich text format (.rtf) file type; use Excel or Open Office Calc for the spreadsheet.

File name:

name your saved files according to your last name, first initial and the week (for example, “jonesb.week1”)

Deciding Between Two Investments in the Healthcare Field-Sample Solution

You are deciding between two investments in the healthcare field. Each investment is projected to produce the following cash flows:

Investment One: Year Cash 0 – $150,000, 1 – $10,000, 2 – $8,000, 3 – $25,000, 4 – $50,000, 5 – $25,000, 6 – $50,000.

Investment Two: Year 0 – $100,000, 1-$0, 2 – $0, 3-0, 4-$0, 5 – $54 000, 6-$65,000.

Assignment Part 1: Assume a discount rate of 5%. Which investment would you prefer? Why?

Based on the net present value (NPV) calculations and assuming a discount rate of 5%, neither of the investment options is a good investment as they both have negative NPVs. Investment one has a Net Present Value of -$3,737, while investment option two has an NPV of -$9,305. Investments with negative NPVs are unacceptable to a firm since they provide returns lower than that initial outlay/capital, which can lower the investment value (Pilbeam, 2018). These calculations show that the investments will not provide a return greater than the discounted rate of 5%.(Investments in Healthcare Essay-Example)

As an investor, the capital budgeting decision must be made based on the expected impact the investment would have on a firm’s value. The NPV calculation is only a single aspect to consider when evaluating an investment (Melicher & Norton, 2019). In healthcare, there are other factors to consider when choosing an investment plan, including risk levels, competition, regulatory environment, and market conditions. However, based on the NVP values, investment option one would be better than investment option two. However, a negative NPV will not provide a greater return than the discount rates applied and is not a good investment option.(Investments in Healthcare Essay-Example)

Assignment Part 2: How would your analysis change if you assumed 3% annual inflation?

Assuming an inflation of 3% is assumed annually, the cash flows for both investments would need to be adjusted for inflation to compare their NPVs accurately. An inflation of 3% would lower the NPVs for all the investments since each real value of cash flow would be less in the consequent years. Taking into account the inflation rate, the NPV decreases further decrease. The NPV value for investment one is now -$22,734, and for Investment Two is -$13,848, indicating that the projects are not profitable under this scenario. It is crucial to consider inflation when evaluating investments since it affects future cashflows and, therefore, the overall value of the investment.(Investments in Healthcare Essay-Example)

The calculations for NPVs have changed due to the impact of inflation on purchasing power. Inflation decreases the purchasing power of the cashflows generated by the investment (Melicher & Norton, 2019). The value of the cash flows generated by the investment decreases over time, considering the impact of inflation on the cost of goods and services that rises. As a result, the future cash flows will be worth less than the present value. When evaluating an investment, it is essential to account for the potential impact of inflation on future cash flows. This justifies adjusting for inflation by incorporating the inflation factor, i.e., the inflation discount rate.(Investments in Healthcare Essay-Example)

Incorporating the inflation rate changes the results of the investment evaluation. This is because the investment will be affected by the decreasing value of cash flows in the future. Ideally, an investment may be profitable without including inflation (Melicher & Norton, 2019). However, with inflation, the same investment may no longer be profitable. Despite the need to incorporate inflation in investment forecasting, forecasting inflation is uncertain and difficult to predict. Considering sensitivity analysis with different inflation scenarios is vital.(Investments in Healthcare Essay-Example)

Assignment Part 3: If investment one was riskier than investment two, how would your calculations change so that additional risk is considered? Also, does this new information change your project preference?

If one investment was riskier than investment two, the discount rate in the calculation of NPV should be increased to account for additional risks, including inflation. Increasing the discount rate for investment option one will account for the additional risk. Future cash flows are reduced by discount rates (Mayo, 2020). A higher discount rate will lower the present value of future cash flows. Thus, the future money will be worth less than the present value. A higher discount rate would lower the NPV value for investment option one, making it less attractive compared to the second investment option. Therefore, the new information would change my preference for the project since higher-risk investment options will be less attractive.(Investments in Healthcare Essay-Example)

Nevertheless, it is difficult to determine which option is riskier solely on NPV calculations. Net Profit Calculations only consider the cash flow projections and discount rates but ignore other significant investment considerations, including inflation rates (Melicher & Norton, 2019). Besides, NPVs do not provide additional information about the risks of the two investments. Generally, a high return on investment is associated with a higher level of risk. In this case, cash flows do not provide adequate information to determine the risk level associated with each investment option. Therefore, information on the industry, management, competition, and existing legislation is needed. As an investor, it is crucial to consider these factors to ensure an investment return is worth the investment. (Investments in Healthcare Essay-Example)

References

Mayo, H. B. (2020). Investments: an introduction. Cengage Learning.

Melicher, R. W., & Norton, E. A. (2019). Introduction to Finance: Markets, Investments, and Financial Management (17th ed.). Wiley Global Education US. https://mbsdirect.vitalsource.com/books/9781119560579

Pilbeam, K. (2018). Finance and financial markets. Bloomsbury Publishing.