Financial Analysis for Dental Practice Investment - Prof. Lagunes Arellano, Ejercicios de Matemáticas Orientadas a las Enseñanzas Aplicadas

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La casa de Odón Pérez, el ratón de los dientes

Investment scenario

modeling

Alonso Castillo Montes de Oca • A

Evidence 2

October 20th, 2023

Context Odon Perez, a recent graduate in Pediatric Dentistry, aspires to start his professional career by establishing a dental practice in his hometown, using a property owned by his parents. To finance his dental clinic, he considers obtaining a bank loan of $800,000 MXN. Odon is a conscientious borrower with a good credit history, allowing him to explore various bank loan options to determine the most favorable one. Simultaneously, his parents offer to become partners in the practice, contributing 15% of the capital in exchange for a return based on a calculated financial model. Two scenarios are contemplated, one where Odón accepts his parents as partners and another where can take a bank loan but he pays rent to them for $120,000MXN. Both scenarios project changing income (15%) and expenses (8%) over five years due to his growing reputation as a dentist and factors such as inflation. Odon faces a difficult decision, choosing the right financing option and whether to invest in the dental clinic. Key factors he must know include determining the most cost-effective bank loan, comparing the cost of financing with his parents' partnership, evaluating net cash flows, and identifying which financing alternative yields the highest returns. Along this analysis, solutions will be provided for each point to be addressed in order to arrive at the best option.

Figure 3: Castillo, A. (2023). Representation of annual cost of BanBajio bank Likewise, the data had to be obtained to be able to calculate the next interest, in this case the CETES of 11.05% belonging to October 12, 2023 will be used, the beta was provided by the context of the situation and obtaining the CPI as the calculation of the CAPM resulting in 3.196%, meaning that the investment has an expected return of said percentage, above the risk-free return. Figure 4: Castillo, A. (2023). CAPM On the other hand, since the bank, Caja Popular Mexicana, was chosen, the interest they offer (35.88%) was used, considering that two options are presented. On the one hand, TREMA is a measure of the total risk of an investment, which takes into account the beta of the asset, market volatility and general economic conditions. The TRME of 30.01% means that option 1 is a very risky investment, with great risks. On the other hand, option 2 has a TREMA of 27.82%, which is still high, but is less risky than option 1. The WACC, understood as a weighted capital of a company that takes into account the cost of debt and the cost of equity. The WACC of 25.11600% means that option 1 has a very high cost of capital. Option 2 has a WACC of 23.00610%, which is still high, but is less expensive than Option 1.

Figure 5: Castillo, A. (2023). Contrast of WACC and TREMA of option one and two In the first instance, option 2 is a better option according to WACC/interest compared to option 1, since it is less risky and less expensive. However, it is important to keep in mind that both options are very risky investments. It is considered that Odon can speak with a financial advisor before investing in any of these options, considering risk factors that may intervene in the process. Having the necessary data, a cash flow table has been made, where you can notice the difference in money throughout the periods, taking into account the increase per period of 15% and the decrease of 8%. where the NPV has been calculated, where it can be seen that in the first case, the first five periods are not enough to cover the investment, especially due to the low IRR that it shows, which means that it is very difficult for the short term , medium and long term can be considered a viable option, since the IRR is considerably low compared to the original interest, this is consistent with what was mentioned previously using the WACC and TREMA which ends up determining the way in which an investment It is risky and it is better not to take action.

Investing decision On the other hand, the second option has been evaluated that has been more viable, since the parents’ offer, has been considered as positive or optimistic in relation to the estimated periods of the investment as can be seen in the following table where the cash flows by period were obtained, the NPV and the IRR: Figure 8: Castillo, A. (2023). Cash flow, NPV & IRR table of calculation In this case, a positive NPV is observed and the investment is definitely completely covered and a first profit of more than $104,958.77MXN, valuing, above all, the IRR of 28.31%, which is greater than the original interest, especially if taken into account. It takes into account the %equity and %debt that were established for the situation, which implies a positive solution to make an investment decision. Figure 8: Castillo, A. (2023).Cash flow table of option two with market value and payback Likewise, and more specifically through a cash flow table, the market value was calculated, which is more than double that of the first option, giving this option a great

opportunity to be beneficial in the medium and long term. Likewise, the covered payback in the middle of the fourth period is valued too much, which despite not being too advantageous, ensures that the investment is recovered even before the established periods, also considering that it had been evaluated as a risky option, Through a breakdown you can see how it is not as risky as it seemed and somehow contradicting what the WACC and TREMA tried to tell, however that does not eliminate the external factors involved in this investment. In any case, the opportunity band of this investment option has been demonstrated not only in these periods, but also by prevailing in this option and still obtaining greater and significant profits for Odon’s clinic.

time, it will be more profitable, only considering that in the next period (6th period) the NPV is going to grow $199,057MXN and reaching $476,217MXN, almost the double. The decision As previously presented, the value of the second option can be evaluated in a safe and realistic way, since it is considered that through the calculated values, the profit will be higher over time. Despite the implication of waiting approximately 4. years to cover the investment it is still very profitable and suitable for Odon. However, this is a great advantage compared to the first option, where it can to some extent, be considered that it can serve as a second option in the long term because after the 5 years period, it is still far from the payback, considering that there is still more than $300,000 MXN to achieve it, in addition to this, it is estimated that per period only increases approximately $100,000 MXN, which means that the payback will not arrive until a certain period that will be greater than 7 years and as of now, the best option is the parents’ option. Considering the third option, even if this alternative is optimistic, in reality this alternative would be unlikely to happen and this option would be complicated to find as an investment option due to the high amount of profits, benefits and above all the time in which the investment is covered. So, first, only taking into account the three options without further context, the third option is chosen. On the other hand, if the real world context is considered, it is not a realistic way of investment and not even for a person who is about to run their business, in this sense, the best option is the second option, which is more realistic and assures a great increment on the net present value over time.

Conclusion In conclusion, regardless of the option that Odon chooses, you must always take into account all financial concepts in their entirety, to be able to interpret them and know what they are trying to say and know if in the first instance it can be a viable option. , or what was shown with option two may happen, resulting in a viable option despite first impressions as a risky but viable path. Likewise, as has been mentioned, it is important to always consider the different variables at play since not only are these the bands of opportunity that, in this case, Odon has to invest, but depending on the context of each one, it can lead him to make a decision. a decision that simply is not the best financially, either way it may be somewhat beneficial as option one or you can simply make an option as good as option three. In any case, the fact that financial and non-financial factors are always present at all times, which can definitely change the course of an investment decision. However, it will always be necessary to go through this type of analysis to be able to assess what is presented and to be able to take the best for each person's future, in this case leaving Odon's possibilities open to consider which options suit him and if he really It will be of great help to your clinic. Furthermore, knowing how to value the ratios in this type of analysis is very important, especially because of the valuation and importance regarding the NPV and the IRR, which are crucial when making a better financial decision.