TYPE YOUR COLLECGE NAME

Home Health Care

Choice between capacity addition or Purchase of
Tablets
Type Your Name
11/30/2015

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The report contains the following section: Executive Summary, Option 1: Add new nurses to service
increase number of visits per years, Option 1: Assumption Table, Option 1: Evaluation, Option 2: Do not
add new nurse but replace existing laptop with new tablet to service increase number of visits per years,
Option 2: Assumption Table, Option 2: Evaluation, Recommendation
Contents
Executive Summary .................................................................................... 3
Option 1: Add new nurses to service increase number of visits per years ... 4
Option 1: Assumption Table ........................................................................ 5
Option 1: Evaluation ................................................................................... 6
Option 2: Do not add new nurse but replace existing laptop with new tablet
to service increase number of visits per years ............................................ 7
Option 2: Assumption Table ........................................................................ 8
Option 2: Evaluation ................................................................................... 9
Recommendation...................................................................................... 10

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Executive Summary

The report contains a present worth analysis of a proposal that is under consideration

by Home Health Care (HHC) which supplies nursing care to the patients at latters

home. Mostly patients are referred to the agency by doctors and hospitals which

transmit information electronically to HHC office. The agency is facing two business

issues. One is the slow growth and the other is requirement to add capacity. Besides,

laptop issued to nurses need replacement as they are nearing their end of economic

life.

The note covers evaluation of two different proposals for as a solution to above

problem:

Add new hires and cater to increase demand

Do not add capacity. Replace laptop of existing force of 40 nurses with tablets to

cater increase demand.

Both the proposal has been evaluated based on present worth of incremental cash

flows after considering several assumptions on capital expenditure, increased number

of visits per year, incremental operating cost and minimum acceptable rate of return.

Based on evaluation, both proposals are yielding positive NPV. In case of option 1, the

NPV or present worth is $298,488. However, in case of option 2, the NPV or present

worth is $398,491.

Based on NPV or present worth approach, option 2 is more profitable and hence the

same should be chosen.

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Option 1: Add new nurses to service increase number of visits per
years

Under this proposal, new nurses are assumed to be added over next three years and

investment required in laptop for such increase staff is considered in year 0. Additional

cost is considered for conversion of new laptops to HHC requirement in year 0.

No change has been assumed in average number of visits per week per nurse.

However it is assumed that every new nurse will be doing same average number of

visits per week from day 1 of addition.

Average revenue per visit for entire year in case of each nurse is $112.

For every new nurse salary which is considered per year is $95,000. This cost is

relevant only if new nurse is added or considered in any particular year.

Other costs which are considered on a per visit basis are travel cost and supplies which

are $6.50 and $8.00 per visit per year per nurse respectively. In addition, site annual

maintenance contract expense and depreciation expense are considered for the

purpose of evaluation. Depreciation is considered basis 3-year MACRS table. Tax rate

assumed for calculation is 22%. Minimum acceptable rate of return used for calculating

NPV or present worth is 14%.

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Option 1: Assumption Table

Laptop Replacement
Year 0 Year 3
Investment Depreciable
Replacement Laptops ( to be spend in Yr
$1,000
0) each nurse yes
Laptop Conversion $5,000 total cost Yes
Nurse Training
Staff Training

Nurse Staffing Year 0 Year 1 Year 2 Year 3

Nurses 40 43 45 47
Change in # of nursesNurses 0 3 5 7
Visits per week 30 30 30 30
Change in Visits per week 0 0 0
Weeks per year 48 48 48
Addl.Visits per year (calculated) 4,320 7,200 10,080
Nursing Salaries ea. incl. benefits $95,000 $95,000 $95,000

Office Staffing
Added staff 0 0 0 0
Staff Salary incl. benefits
Revenue
Average revenue per visit $112.00 all years
Cost per visit
Travel cost $6.50 per visit all years
Cloud Processing cost $0.00 per visit all years
Supplies $8.00 per visit all years
Annual Expenses
Tablet Software Licenses $0.00 annually per nurse all years
Site Office software $0.00 annually- all all years
Site Maintenance contract $45,000.00 annually- all all years
Wireless contract $0.00 Monthly per nurse all years
Other
Present Laptops Book Value $0.00 each
Time horizon 3 Years
Tax Rate 22%
MARR 14%
MACRS 3 years

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Option 1: Evaluation
Year Cost per visit per year 0 1 2 3 4
Change in # of Nurses 15
Replacement capex per nurse $1,000
Laptop Replacement capex $15,000
Laptop Conversion cost $5,000
Total Capex ($20,000)

Revenue
Additional visits of patients per year 4,320 7,200 10,080 -
Avg revenue per visit per year $112.00
Yearly incremental revenue $483,840 $806,400 $1,128,960 $0

Costs
Travel cost per visit per year $6.50
Cloud processing cost per visit per year $0.00
Supplies per visit per year $8.00
Total per visit cost per year $14.50

Incremental vist cost per year ($62,640) ($104,400) ($146,160) $0

Annual site maintenance contract ($45,000) ($45,000) ($45,000) $0
Nursing Salaries ea. incl. benefits ($285,000) ($475,000) ($665,000) $0
Total annual incremental cost ($392,640) ($624,400) ($856,160) $0

Annual Depreciation rate (MACRS 3-Yrs) 33.33% 44.45% 14.81% 7.41%

Annual Depreciation ($6,666) ($8,890) ($2,962) ($1,482)
Total annual incremental cost incl depreciation ($399,306) ($633,290) ($859,122)

Profit before tax $84,534 $173,110 $269,838

Less: Tax at 22% ($18,597) ($38,084) ($59,364)
Profit after tax $65,937 $135,026 $210,474
Add: Depreciation $6,666 $8,890 $2,962
Add: Salvage Value (If any) $0
Less: Capex ($20,000)
Free Cash Flow ($20,000) $72,603 $143,916 $213,436
Discounting Factor 14% 1.0000 0.8772 0.7695 0.6750
PV of FCF ($20,000) $63,686 $110,739 $144,063
NPV or Present Worth $298,488
IRR 434.85%

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Option 2: Do not add new nurse but replace existing laptop with new
tablet to service increase number of visits per years

Under this proposal, existing laptop is replaced with efficient tablet so as to increase the

per visit capability of each nurse within the existing force of 40 nurses. No new nurses

under this option are considered for evaluation. Additional cost is considered for

conversion of database for alignment with tablet in year 0. Further initial cost on training

is also considered towards nurse training and staff training in year 0.

Under this option change has been assumed in average number of visits per week per

nurse. Only incremental number of visits per week per nurse has been considered for

evaluation. Average revenue per visit for entire year in case of each nurse is $112.

Since no new nurses are added under this option no incremental cost has been

assumed on nurse salary. However, since 1 extra staff is required, incremental salary

towards this staff has been considered for evaluation.

Other costs which are considered on a per visit basis are travel cost, cloud processing

cost and supplies which are $6.50, $3.00 and $8.00 per visit per year per nurse per

year. In addition, tablet software license fee has been assumed at $50 per nurse per

year. Further, site office software annual cost at $40,000 per year has been also been

considered. Also wireless annual contract charges of $500 per month per nurse have

also been considered. Lastly, annual site maintenance contract expense and

depreciation expense are considered for the purpose of evaluation. Depreciation is

considered basis 3-year MACRS table. Tax rate assumed for calculation is 22%.

Minimum acceptable rate of return used for calculating NPV or present worth is 14%.

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Option 2: Assumption Table

Tablet Proposal
Year 0 Year 3
Investment Depreciable
Replacement Tablets $750.00 each nurse Yes
Database Conversion $30,000.00 total cost Yes
Nurse Training $500.00 each nurse No
Staff Training $10,000.00 total cost No

Nurse Staffing Year 0 Year 1 Year 2 Year 3

Nurses 40 40 40 40
Change in # of nursesNurses 0 0 0 0
Visits per week 30 32 34 35
Change in Visits per week 2 4 5
Weeks per year 48 48 48
Addl.Visits per year (calculated) 3,840 7,680 9,600
Nursing Salaries ea. incl. benefits $95,000 $95,000 $95,000

Office Staffing
Added staff 1 1 1
Staff Salary incl. benefits $60,000 $60,000 $60,000 $60,000
Revenue
Average revenue per visit $112.00 all years
Cost per visit
Travel cost $6.50 per visit all years
Cloud Processing cost $3.00 per visit all years
Supplies $8.00 per visit all years
Annual Expenses
Tablet Software Licenses $50.00 annually per nurse all years
Site Office software $40,000.00 annually- all all years
Site Maintenance contract $35,000.00 annually- all all years
Wireless contract $500.00 Monthly per nurse all years
Other
Present Laptops Book Value $0.00 each
Time horizon 3 Years
Tax Rate 22%
MARR 14%
MACRS 3 years

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Option 2: Evaluation
Year Cost per visit per year 0 1 2 3 4
Existing force of nurses 40
Tablet capex per nurse $750
Laptop Replacement capex $30,000
Database conversion $30,000
Equipment Capex ($60,000)
Nurse Training $20,000
Staff Training $10,000
Training Capex ($30,000)
Total Capex ($90,000)

Revenue
Additional visits of patients per year 3,840 7,680 9,600 -
Avg revenue per visit per year $112.00
Yearly incremental revenue $430,080 $860,160 $1,075,200 $0

Costs
Travel cost per visit per year $6.50
Cloud processing cost per visit per year $3.00
Supplies per visit per year $8.00
Total per visit cost per year $17.50
Tablet Software License (Annual cost per nurse) $50
Wireless contract (monthly cost per nurse) $500.00

Incremental vist cost per year ($67,200) ($134,400) ($168,000) $0

Incremental staff salary ($60,000) ($60,000) ($60,000)
Annual site maintenance contract ($35,000) ($35,000) ($35,000) $0
Site Office Software ($40,000) ($40,000) ($40,000) $0
Tablet Software License ($2,000) ($2,000) ($2,000) $0
Wireless contract ($240,000) ($240,000) ($240,000) $0
Incremental Nursing Salaries ea. incl. benefits $0 $0 $0 $0
Total annual incremental cost ($444,200) ($511,400) ($545,000) $0

Annual Depreciation rate (MACRS 3-Yrs) 33.33% 44.45% 14.81% 7.41%

Annual Depreciation ($19,998) ($26,670) ($8,886) ($4,446)
Total annual incremental cost incl depreciation ($464,198) ($538,070) ($553,886)

Profit before tax ($34,118) $322,090 $521,314 $0

Less: Tax at 22% 22% $7,506 ($70,860) ($114,689) $0
Profit after tax ($26,612) $251,230 $406,625 $0
Add: Depreciation $19,998 $26,670 $8,886 $0
Add: Salvage Value (If any) $0 $0
Less: Capex ($90,000)
Free Cash Flow ($90,000) ($6,614) $277,900 $415,511 $0
Discounting Factor 14% 1.0000 0.8772 0.7695 0.6750 -
PV of FCF ($90,000) ($5,802) $213,835 $280,458 $0
NPV or Present Worth $398,491
IRR 123.39%

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Recommendation

Based on above evaluation, NPV / Present worth or IRR is higher in case of Option 2.
NPV / Present worth in case of Option 1 is $298,488 and IRR is 434.85%. In case of
Option 2, NPV / Present worth is $398,491 and IRR is 123.39%.

Basis IRR, both options are feasible and make economic sense as IRR under both
options is significantly higher than MARR of 10% (higher is case of Option 1). Hence,
NPV is the best metric for arriving at final decision. Since NPV is higher in case of
Option 2, hence Option 2 is profitable and should be chosen.

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