This weeks assignment is the third component of our ROI project. The focus of this weeks short paper writing will be to consider the justification of capital expenditure. Three key aspects should be considered: (1) Amount and type of expenditure (2) Attainment of key decision criteria (3) Detailed financial analysis.
Using Pro-forma data taken from our outside reading A Cost-Benefit Analysis- Bardon, C. G., Wang, S. J., Middleton, B., Prosser, L. A., Spurr, C. D., Carchidi, P. J., et al. (2003). The American Journal of Medicine,114.) prepare a net present value analysis by calculating a hurdle rate, profitability index, for your capital project. Do not consider capital cost reimbursement from third-party payers in your calculation.
Finally, consider in your writing how you would factor risks such as technology change, Physician acceptance, competition from other HCOs, accuracy of market data, and volume projections associated with the capital project (see attached hurdle rate determination worksheet below) in your discount rate.
Net Present Value Discount Rate (Hurdle Rate) Determination Worksheet
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The following analysis can be used to determine the NPV Discount Rate (Hurdle Rate) Determination.
Risk Free Rate 6%
(free cash flows-cash flows that are available to stakeholders (e.g., equity and debt holders) after consideration for taxes, capital expenditures, and working capital needs).
Adjustment for Risk
Intrinsic risk of a specific business (little or no risk) 04%
Changing technology
Physician implications
Changing reimbursement
Hospital management expertise
Competition considerations
Position on continuum of life cycle (low to moderate risk) 03%
Recent development, new to area
Established and accepted service; success predicated on
Garnering others market share
Unique risks to the program/service (moderate to higher risk) 0-4%
Accuracy of market data and volume projections
Risk of failure to meet the targeted volume
The sensitivity of pro-forms to deviation from forecast assumptions
Projection and/or payback method
Projects with unacceptable risks (higher risk) 0-20%
Range of Discount Rates for use in determining the Net Present
Value of Future Cash Flows _______
6-21%
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