Written Analysis on the Financial Statement of Marc Merchandise

Alvarez, Yvonne, Fontanilla, Janie, Palazuelo, Yvet, Molejon, Vince, Salvaña, Clint

INTRODUCTION

In order for the company to keep on progressing, efficient and effective

management by the business leaders is the key. Driving their decisions by different
important factors would be able to have a significant impact towards the possible outcome
for the business. Businesses do not come into existence by just generating cash which prove
to show that most of them really do require some level of capital expenditure to get started
and survive.

Capital budgeting involves effective management of the business’ expenditure to

cater the project that matters most for them. From this, it can be understood that capital
budgeting involves answering the issue on long term capital investment of the company.
The management would then decide among the different projects which help the business
achieve its objectives worthy of funding.

Dadiangas General Hospital a family owned business located in General Santos

City is planning to expand its reach in the city. The hospital was bound to have different
challenges that they think relevant towards the success of the plan. Now, this paper is
greatly geared towards answering the relevant questions employed in the paper.
Furthermore, the paper aims to answer the following questions: “How should the
management be led to be able to properly evaluate the viability of the project? and What
strategic actions should the project entail to make it viable?”.
BACKGROUND

Dadiangas General Hospital (DGH) is one of the pioneering hospitals in General

Santos City which aimed at delivering health care services to all the people in the area,
regardless of their status in the society. This vision led the growth of DGH over the years.
Over the past years the company have really maintained its position as the second biggest
hospital. This included size in terms of bed capacity and market share. The promotion of
its license to tertiary level was also a welcomed development because it opened
opportunities for the hospital to provide additional and better hospital and medical services.
It started as a single proprietor which later on was incorporated to cope up with the growth
and demand for additional hospital and medical services.

DGH Brief Company Timeline

DGH was established, the very first medical facility in GSC with 25 bed
1962
capacity.
Granted LTO to operate as a tertiary general hospital (Level II) in which
1975 DGH became a major health care provider not just in the city but also in
the entire SOCSKSARGEN Region.
Decided to incorporate the hospital in order to cope up with the growth and
1987
demand for additional hospital and medical services; registered at SEC.
DGH reached the 100 bed capacity level; difficulty for the hospital to meet
the targeted revenues (operations & marketing); high costs of investment
1990 financing due to lack of financial planning; This resulted in the hospital
experiencing cash flow problems, which led to difficulties in meeting
periodic amortization of its bank loans in the succeeding years.
Decided to incorporate the hospital in order to cope up with the growth and
demand for additional hospital and medical services. Expansion of the
1996 hospital building that increased its bed capacity from 25 to 125, and the
construction of two-building medical plaza (I and II) to house the medical
clinics of known medical specialists in the area.
Projects were completed in the 3rd quarter; DGH had secured full
accreditation from the Philippine Health Insurance Corporation
1997
(PhilHealth) for all its 125 bed capacity; experienced the Asian financial
crises.
DGH was granted by the Department of Health the highest hospital
2005 classification to operate as a general tertiary and training hospital (Level
III) with an authorized bed capacity of 125 beds.
 The company has undergone major expansion on 1997 which was handled by Mr.
Viloria that resulted in a significant increase in the occupancy rate of the hospital. Although
this benefited the company, over the years the company encountered major problems in the
financial aspect like liquidity which is also caused by the Asian crisis in 1997. The financial
leverage of DGH had not also been desirable during the same period. This has been a
learning experience for the company especially in managing its capital.

The Chairman of the company wanted to implement a new expansion project of the
hospital in which a proposal without substantial deliberations by the Board of Directors
(BOD). Mr. Viloria was quite hesitant at first but then recognized the potential of the said
project for helping DGH scale greater heights to become a premier hospital in the area.
But, there were issues to be resolved before this idea could, in fact, materialize.

Management Structure of DGH follows a patriarchal structure where the father

often led the management of the business. The decision making is highly centralized and
the majority of the family members were given managerial and administrative functions.
Medical staff plays the most dominant role in all stages of the capital budgeting process.
Thus the management decided to set-up new organizational structure to professionalize
DGH and to spread out the decision-making processes to improve and hasten delivery of
hospital services. Appointment of highly qualified personnel to lead key departments was
done. Another initiative that was done was to engaged a few consultants to help streamline
hospital operations, and to review and establish pertinent policies and procedures. This
resulted into the formulation of an operations manual for key business processes, as well
as a manpower structure, including setting up of more formal salary schemes to replace the
relatively discretionary approach to salary structure. Initiatives to integrate quality
management in the hospital’s operations was also done. Continuing evaluations of all the
medical-related business processes were also conducted. The management also insisted
that en evaluation of the financial condition of the company had to be completed first – to
determine whether DGH would have the financial resources or would need to secure
external borrowing to embark on another project that would require huge amount of
investment.

PROPOSED SOLUTION

In order to address the concern of Mr. Viola with regards to how he should lead the
management on properly evaluating the viability of the project and to know what strategic
actions be made to make the project viable, an assessment on capital budgeting should be
made. Upon analysis of the problem it turned out that there are many evaluation criteria
from which Mr. Viola may refer to in order to assess the viability of the project.

First evaluation criteria is the Net Present Value (NPV). NPV is the most commonly
used evaluation criteria used in capital appraisal. This evaluation is defined as the value in
today’s money in the net cash flows. This criteria is applicable for evaluation in the case
of DGH as the main concern pertains to knowing if the project is worth on pursuing or not.

Second evaluation criteria Mr, Viola would have to perform is the assessment on
Internal Rate of Return (IRR). Said to be the best method for investment appraisal, IRR
however, is not as widely used as compared to NPV. This evaluation is best described as
similar to a break-even analysis as one compares the NPV of two different investment
projects or with investments having different cash outlay requirements.

It is not necessary for the evaluation of the viability of the project to be based in
one criterion only. It is much referable for Mr. Viola present the assessment based on a
combined analysis of the two. In this case, DGH is able to ensure that a large profitable
project is not rejected in favor is smaller project with higher IRR.

Third evaluation to be done involve the assessment on the Payback Period.

Basically, the payback period shall provide Mr. Viola the information on the length of time
it takes for DGH to recover from its initial cost of investment.

Fourth and final evaluation criteria for the proposed project of DGH is the
Discounted Payback Period. The assessment for discounted payback period involves the
consideration for discounted cash inflows.
RECOMMENDATION

In line with the proposed solutions, Dadiangas General Hospital may be able to
fully assess if the proposed project is viable or not based on the results derived from the
evaluation criteria.

Upon assessment with Net Present Value (NPV), the decision for pursuit of the
project shall be made when it has a positive NPV and its cash inflow are discounted at the
opportunity cost of capital. For Internal Rate of Return (IRR), the decision to pursue the
project shall be made when the project reflects the highest IRR value. Combining both
criteria, it is much favorable for DGH if the investment proposed shows a shorter number
of years for it to recover the initial costs of investment.

Finally, for both Payback Period and Discounted Payback Period, the decision for
pursuit of the project shall be made when the project reflects the shortest number of years
possible for the company to recover its initial investment.

Furthermore, aside from the quantitative analysis, a qualitative analysis should also
be made to have a holistic analysis to see if it is viable for DGH to pursue with the project.
Factors such as the alignment of the investment decision made with DGH’s visions,
missions, and goals, the business direction DGH is looking forward to, the company’s
appetite for risk, and of course its desired rate of return perceived from the project.