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Financial Management in Healthcare: Choosing a Project with NPV, ROI, PI and Case Mix

Scenario:

You have been hired in the finance department at a large, metropolitan for-profit hospital. Your duties are very important to the entire hospital in terms of financing operating costs. Additionally, you are also in charge of 3 employees who work under you to help with the day-to-day accounting activities. Your role includes budgeting, managing the general ledger accounts, utilizing financial formulas to perform accounting activities, and training and development of your 3 employees. This professional career is exciting and challenging for you, but is also enjoyable and rewarding as you work your way up the career ladder toward reaching your goal of becoming the chief executive officer (CEO) of the hospital. Due to scarce resources, your organization is faced with the decision of choosing between mutually exclusive projects (I.e., Build a Rehab. Center or Build a Neonatal Wing). You have been asked to develop a financial analysis of two projects and based on Net Present Value (NPV), Return on Investment (ROI), and Profitability Index (PI), Briefly explain the following concepts and their use/value in assessing the validity of the two mutually exclusive projects:

1) NPV
2) ROI
3) PI
4) Payer (aka case) Mix

Solution Preview

Several tools may be used to analyze the two investment options. Among them are the following:

1. Net Present Value (NPV):

Assessing the validity and feasibility of two mutually exclusive projects using the NPV method involves measuring the net value of an investment proposal in terms of today's dollars (or any other currency) (Keown et al., 2002). This method requires information on the investment outlay and the expected future free cash flows. All the amounts must be expressed in terms of their present values in order to determine the net value of the investment. The initial outlay is spent today or at year 0 and as such, the amount is already in its present value form. The expected (or forecasted) future free cash flows must be computed on their present values, making use of an appropriate discount rate and the expected life (number of years) of the investment proposal. From the sum of all the present values of the future cash flows, the initial outlay is deducted to compute the net present value.

Net Present Value is ...

Solution Summary

The solution finds and compares the NPV, ROI, PI and Payer Mix for each project after explaining briefly what they are and how to get them. 662 words with a reference included.

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