This is healthcare finance.

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 the 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 you capital project. Do not consider capital cost reimbursement from third-party payers in your calculation.

Finally, consider in your writing how you would factor risk such as technology change, Physician acceptance, competition from other Health Care Organizations, 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.

1. 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).

1. Adjustment for Risk
2. Intrinsic risk of a specific business (little or no risk) 04%

• Changing technology
• Physician implications
• Changing reimbursement
• Hospital management expertise
• Competition considerations

1. 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

1. Unique risks to the program/service (moderate to higher risk) 0-4%

• Accuracy of market data and volume projections
• Risk of failure to meet targeted volume
• Sensitivity of pro forms to deviation from forecast assumptions
• Projection and/or pay back method

1. 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%