Report - Midwestern Hospital Association, Inc.
Midwestern Hospital Association, Inc. is interested in upgrading its nursing tower facilities in response to technological obsolescence, rising energy and maintenance costs, and increasing staffing costs. There are three alternatives under consideration. These alternatives include: remain in existing nursing towers (do nothing), renovate the existing facilities, or build new nursing towers. The estimated costs of the three alternatives are as follows:
| Alternative 1- Remain in existing nursing towers |
Cost, $ |
| Replace air-handling units within 5 years |
2,000,000 |
| Re-roof nursing towers - 10 years |
250,000 |
| Nursing tower value |
0% |
| Annual energy consumption |
850,000 |
| Maintenance/repair costs per year |
1,250,000 |
| Nursing staff annual costs |
7,776,000 |
|
|
| Alternative 2- Renovate nursing towers [200,000 gross square feet (GSF)] |
Cost, $ |
| Renovation construction cost |
50/GFS |
| Re-roof nursing towers in 10 years |
250,000 |
| Nursing tower value assumed in 25 years (salvage) |
0% |
| Estimated annual energy costs |
750,000 |
| Maintenance/repair costs per year |
1,100,000 |
| Nursing staff annual costs |
6,480,000 |
|
|
| Alternative 3- Build new nursing towers (180,000 GSF) |
Cost, $ |
| New construction cost |
120/GSF |
| Demolish existing nursing towers |
5/GSF |
| Nursing toer value assumed in 25 years (salvage) |
50% |
| Estimated annual energy costs |
650,000 |
| Maintenance/repair costs per year |
800,000 |
| Nursing staff annual costs |
5,180,000 |
The hospital's Sr. Vice President of Facilities requested that you, the Construction Manager, provide a recommendation regarding the alternative of choice. You must perform a life cycle cost analysis by computing both the Present Worth (PW) and the Equivalent Annual Worth (EAW) or Costs (EAC). The economic criteria for the analysis are as follows:
- Project life cycle 25 years
- Interest Rate 10% compounded annually
- Inflation approach Constant dollars
- Staffing costs escalation 5% per year
Report shall be exactly five pages (excluding cover) comprehensively addressing your analysis and subsequent decision. The report shall be single-spaced; 12-pt Aerial font. It should include your spreadsheet analysis and any other graphics that will explain and support your decision. Content copied from Excel should include data blocks and cash flow tables. Other acceptable graphics include charts generated in Excel graphically depicting cash flows or sensitivity analysis The narrative should properly frame the problem, describe the life cycle cost (LCC) analysis processes viewed in terms of both present worth and equivalent annual worth, address the nature of the LCC variables, and the risks introduced by variability. State and defend your recommendation for the selected alternative. Is there a way to calculate the IRR for each alternative? If so, is it meaningful or appropriate? Can benefit/cost ratios be computed for the three alternatives? Can discounted payback periods be computed for the alternatives? Are there other considerations that may not be as easily quantifiable, but should be considered nonetheless?