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Investment Analysis of Ontario Specialized Medical center (OSMC)

Assessing the viability of new Clinic- Ontario Specialized Medical center (OSMC)

Description of Project

In this project, a viability of a new specialized clinic is to be analyzed. Ontario Specialized Medical center (OSMC) operates in the Moosonee region, and Dr. Banderas Capadia is contemplating an idea to open a new specialized clinic with the same name in Akimiski Island near Attawapiskat which will deal with Orthopedic, stress related illness and brain disorders and damage.OSMC has to decide, whether to start operations in this new dimension and pursue these new challenges or not(Marlene M. Coleman, 2006).To achieve the objectives described requires the capital and financial resources which could help the OSMC to achieve the desired results. OSMC also should quantify the number of expected footfall in the clinic, though lack of specialized treatment available in the region confirms it, but it must be analyzed.    This clinic will work as a specialized diagnostic center and upon diagnosis, patients will be asked to report to different hospitals with expertise to treat the advance level of problems, if uncured with treatment at the clinic or surgeries needed(Todd, 2014).

Revenue sources

 This will be a private clinic with objective to use the initiative to increase the revenues of OSMC. Since, this area lacks the specialist clinics in this part of Canada. So, it could be extremely profitable as patients are expected to attend the clinic. In addition, as this a remote part of Canada and due to extreme weather, numbers of patients with orthopedic diseases have been increasing all the time. So, all this could result in higher revenues for the clinic. Besides, as the population is increasing and elderly population in the region is increasing, therefore, it will benefit the clinic revenues. In addition, this is a diversification into other domains of medicine, and building a new clinic will certainly enhance the portfolio of the OSMC and its risk will also decline. Returns will increase and will be social beneficial, as it will bring the new innovative methods of treatment in this community and will be beneficial for the region.

Raising a start-up Capital

Dr. Banderas Capadia has used three sources for raising capital; local bank, friends and family (F&F)  and Anderson Angels. He raised $0.2 million of the startup capital from his friends and family. In addition, to this, he had open discussion with Angel networks and prepared a presentation and briefed a fund based in Toronto to invest in clinic. Anderson Angels had confirmed that they will invest $1.2 million in the clinic. Since, Dr. Banderas Capadia is veteran orthopedic surgeon, and publishes often in famous International medical Journals; therefore, with someone like him venturing into new business was enough to convince the investors(Preston, 2007). He also raised about $0.4 million from a local bank in Ontario, where he was keeping his first clinic’s accounts.

Financial Aspects

The clinic will require highly skilled doctors/physicians, highly qualified assisting staff; physician assistants, nurse practitioners (for those patients who are kept in, until shifted to specialized hospital, in case of emergency). Clinic is divided into three division; orthopedic, psychology and brain disorders and damage. All three divisions will have their own laboratories. Clinic will ensure that universal safety precautions to protect the patients both medically and physically are kept in place(Weiner, 2001). Patient safety management committee will also be put in place to monitor the initiatives.

Financial Performa and analysis

The Cash flow analysis is performed on the cash flows generated from five years forecasted figures. These figures are forecasted after taking in view the expected patients inflow in the clinic. The net cash flows for the 5 years are positive except for the first year and the average cash flows for the project are $352,333.33. Based on the assumptions, which are presented in Appendix I, different capital investment techniques to measure the capital investment appraisal are used. The most important one is the net present value (NPV) which is $5830000; internal rate of return (IRR) is 73%. Payback period for the investment is 1.6 years.  All these measures indicate that investment is worthwhile. Since, the internal  rate of return is 73% which is greater than the 12% cost of capital which indicates that investment should be accepted and the project OSMC should go ahead as it appeared to be very profitable venture.

Inflation rate for the period was predicted to stay stable at 2%. Since, there was subdued economic activity in recent times and with global economic meltdown, it expected that economy will struggle in coming years; therefore, inflation will remain fairly stable. The diversification into new specialized medical treatment is a strategic move to ensure that risk is mitigated to lower levels(Drury, 2008). The previous clinic and the hospital is working at full capacity and has been extremely profitable, it is believed that OSMC is in a sound position top even extend more financing in future, if it decides to expand further.  Financing through number of sources gives it a strategic advantage and allow it a greater access to financing markets to finance and manage t eh debts easily in the future. Revenue position of the company is encouraging and it is expected to control it operational expenses in more prudent way. The current magnitude of its operations and its team will have a tremendous opportunity to continue expanding and achieve the forecasted goals by utilizing their capacity efficiently. This venture with specialized team and being the first one to enter into that region is destined to succeed and its investors are expected to improve their returns in the future.

References:

Drury, C. (2008). Management and Cost Accounting. London: South Western Cengage Learning.

Marlene M. Coleman, J. W. (2006). Start Your Own Medical Practice: A Guide to All the Things They Don't Teach. Illinois: Sphinx Publishing.

Preston, S. L. (2007). Angel Financing for Entrepreneurs: Early-Stage Funding for Long-Term Success. San Fransico: Wiley.

Todd, M. K. (2014). Handbook of Concierge Medical Practice Design. Boca Ratan: CRC Press.

Weiner, R. S. (2001). Pain Management: A Practical Guide for Clinicians,. Boca ratan: CRC Press.

 

Appendix:

Assumptions

 

       

 

Depreciation

Straight-Line method is used

 

 

 

salvage values for building and equipment is 750000 and 650000 respectively

 

 

 

 

Useful life for building is 20 years

 

 

Useful life for Equipment is 15years

 

Cost of capital

12%

     

 

Interest  on loan

0.05

 Only interest will be paid in first 5 years, After years, 2% of the principal amount will start getting repaid

 

 

Total Bank loan

$0.40

million

   

 

Interest payment

20000

per month

 

 

Yearly payment

240000

     

 

 

       

 

Anderson Angles

2% on net income

   

 

Friends & Family (F&F)

1% on Net Income (NI)

     

 

 

       

 

Inflation rate

2%

 

 

 

 

 

Depreciation

           

Cost (Building)

      (1,000,000.00)

12500

12500

12500

12500

12500

Equipment

          (800,000.00)

23333.33333

23333.33333

23333.33333

23333.33333

23333.33333

Total

 

35833.33333

35833.33333

35833.33333

35833.33333

35833.33333

Net PPE

 

1764166.667

1728333.333

1692500

1656666.667

1620833.333

 

 

Year 1

Year 2

Year 3

Year 4

Year 5

Payment to Anderson Angels

 

2,646.67

2,926.67

2,206.67

29,086.67

Payment to Friends and Family

 

1,323.33

1,463.33

1,103.33

14,543.33

Total Payment

 

3,970.00

4,390.00

3,310.00

43,630.00

Retained Earnings

 

128,363.33

141,943.33

107,023.33

1,410,703.33

 

Cashflow Analysis for New Clinic

 

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Capital

    (1,000,000.00)

       

 

Equipment

        (800,000.00)

       

 

Revenues

 

       1,200,000.00

    1,500,000.00

       1,600,000.00

      1,650,000.00

    1,680,000.00

Less:

         

 

Labour cost

 

-520000

-550000

-580000

-610000

-640000

Utilities

 

-30000

-35000

-40000

-45000

-50000

Supplies

 

        (500,000.00)

      (550,000.00)

        (600,000.00)

       (650,000.00)

      (700,000.00)

Incremental OH's

 

-15000

-16000

-17000

-18000

-19000

Depreciation

         

 

Cost (Building)

 

12500

12500

12500

12500

12500

Equipment

 

23333.33333

23333.33333

23333.33333

23333.33333

23333.33333

Net Income

 

158,333.33

372,333.33

386,333.33

350,333.33

294,333.33

Plus: Building Slavage Value

         

        750,000.00

Plus: Equipment Slavage value

 

 

 

 

        650,000.00

 Cash Flow's

    (1,800,000.00)

          158,333.33

        372,333.33

          386,333.33

          350,333.33

    1,694,333.33

Interest payment on bank loan

-240000

-240000

-240000

-240000

-240000

Net CF's

 

          (81,666.67)

        132,333.33

          146,333.33

          110,333.33

    1,454,333.33

 

To assess the viability of the project, now different investment appraisal techniques are used                                                                

NPV

Year

Initial CF's

Rev

Net CF's

0

    (1,800,000.00)

 

    (1,800,000.00)

1

 

    1,200,000.00

       1,200,000.00

2

 

    1,500,000.00

       1,500,000.00

3

 

    1,600,000.00

       1,600,000.00

4

 

    1,650,000.00

       1,650,000.00

5

 

    1,680,000.00

       1,680,000.00

 

Payback

Year

Amount left to payback

0

                                            (1,800,000.00)

1

                                               (600,000.00)

2

                                                  900,000.00

3

                                              2,500,000.00

4

                                              4,150,000.00

5

                                              5,830,000.00

 

NPV

$5,830,000.00

 

IRR

73%

 

Payback period

1.6

Years

 

Balance Sheet

 

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Assets

 

 

 

 

 

 

Current Assets

 

2157500

1850970

1859223.33

1965976.67

645870

Cash

 

        (81,666.67)

        132,333.33

        146,333.33

        110,333.33

      1,454,333.33

Other Short term assets

 

0

0

0

0

0

Total Current Assets

-

2075833.333

1983303.333

2005556.663

2076310.003

2100203.333

 

 

 

 

 

 

 

Long term Assets

 

 

 

 

 

 

Net, PPE

    1,800,000.00

1764166.667

1728333.333

1692500

1656666.667

1620833.333

Total Long term Assets

    1,800,000.00

1764166.667

1728333.333

1692500

1656666.667

1620833.333

Total Assets

 

3840000

3711636.667

3698056.663

3732976.67

3721036.667

 

 

 

 

 

 

 

Liabilities & Capital

 

 

 

 

 

 

Interest payment

 

240000

240000

240000

240000

240000

Accounts Payable

 

 

 

 

 

 

Total Current liabilities

-

240000

240000

240000

240000

240000

Other Liability

 

 

 

 

 

1291740

Long term debt

    1,800,000.00

    1,800,000.00

    1,800,000.00

    1,800,000.00

    1,800,000.00

      1,800,000.00

Total liabilities

    1,800,000.00

    2,040,000.00

    2,040,000.00

    2,040,000.00

    2,040,000.00

      3,331,740.00

 

 

 

 

 

 

 

Paid in capital

    1,800,000.00

    1,800,000.00

    1,800,000.00

    1,800,000.00

    1,800,000.00

      1,800,000.00

Retained Earnings

 

0

      (128,363.33)

      (141,943.33)

      (107,023.33)

    (1,410,703.33)

Total Shareholder's Equity

-

    1,800,000.00

    1,671,636.67

    1,658,056.67

    1,692,976.67

          389,296.67

Total Liabilities and Equity

    1,800,000.00

    3,840,000.00

    3,711,636.67

    3,698,056.67

    3,732,976.67

      3,721,036.67

 

 

 

 

Ratios

         
 

Year 1

Year 2

Year 3

Year 4

Year 5

Return on Equity

          0.09

          0.22

          0.23

          0.21

          0.76

Return on Assets

          0.04

          0.10

          0.10

          0.09

          0.08

Cash ratio

-0.34028

0.551389

0.609722

0.459722

6.059722

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