Case Assignment

UNIVERSITY OF VIRGINIA HEALTH SYSTEM:

THE LONG-TERM ACUTE CARE HOSPITAL PROJECT

Pages 381-390

Idea of the case

This case puts students in the shoes of Larry Fitzgerald, the vice president for business development and finance at the University of Virginia Health System (UVa Health System). Students must decide, based on cash flow analysis and nonfinancial factors, whether or not to propose a long-term acute care hospital (LTAC) project to the board of directors of the U.Va. Health System. The LTAC is a very promising undertaking from the perspective of providing better care for patients, but the financial drivers of the project have yet to be assessed.

The primary objective in this case is to portray the major differences in project analysis for nonprofit organizations compared to for-profit companies and to highlight the unique issues relevant in a health care environment.

Questions

1.What are the nonfinancial drivers for adding an LTAC facility to the U.Va. Health System? What are potential reasons the board may not approve the project from a nonfinancial standpoint?

Hints: You can provide points from the case as to why the LTAC facility would be a good addition to the U.Va. Health System from the perspective of the hospital, the patient, and overall health care.

Students could suggest several reasons the board may not approve the project

2.What are the differences between nonprofit institutions and for-profit institutions? For example, how would a for-profit hospital approach the LTAC decision?

3.What is the average cost of capital of the for-profit hospitals provided in case Exhibit 3? Would this serve as a reasonable discount rate to analyze a set of for-profit LTAC facility cash flows? Should Fitzgerald use this number to discount the U.Va. LTAC facility's cash flows?

Hints: Use a market risk premium (MRP) of 6% and the 10-year Treasury yield as the risk-free rate.

Use the data provided in Exhibit 4 page 390.

Determine the WACC in two cases: tax rate = 35% and tax rate = 0.

4.Using the information in the case and the memo from Karen Mulroney in case Exhibit 1, complete the cash flow projections in the spreadsheet provided. What do you get for the NPV and IRR of those cash flows?

5.What are the main drivers for NPV and IRR? Show the impact on NPV and IRR by changing a couple of these drivers to a "downside scenario" value.

Based on your financial analysis, should Fitzgerald propose the LTAC project in the board meeting.

Supporting Spreadsheet Data

The supporting Excel files are available for the convenience of students: