Capital Planning & Investment Analysis Flashcards

A hospital is evaluating two capital projects with the same initial cost. Project A has an IRR of 14% and Project B has an IRR of 11%. The organization's hurdle rate is 12%. Which conclusion is correct?

Answer: Only Project A should be accepted

Only Project A exceeds the 12% hurdle rate; Project B's IRR of 11% falls below it and would destroy value.

Which capital budgeting method is most appropriate when a healthcare organization faces severe capital rationing and must rank mutually exclusive projects?

Answer: Profitability Index (PI)

The Profitability Index ranks projects by value created per dollar invested, making it ideal under capital constraints.

A clinic's capital investment generates after-tax cash flows of $80,000 annually for 6 years. The initial outlay is $300,000. What is the approximate payback period?

Answer: 3.75 years

$300,000 ÷ $80,000 per year = 3.75 years payback period.

In healthcare capital planning, 'strategic alignment' refers to:

Answer: Ensuring capital projects support the organization's mission and long-term goals

Strategic alignment means capital investments should advance the organization's mission, vision, and strategic priorities.

A medical center uses a 7% discount rate and evaluates a $500,000 MRI machine expected to generate $110,000 in net cash flows annually for 6 years. The NPV is approximately:

Answer: $24,000 positive

PV of annuity ($110,000 at 7% for 6 years) ≈ $524,000; NPV ≈ $524,000 − $500,000 = +$24,000.

Which type of capital lease requires the lessee to record the asset and corresponding liability on its balance sheet?

Answer: Finance lease (capital lease)

Under ASC 842, finance leases (formerly capital leases) result in recognition of a right-of-use asset and lease liability on the balance sheet.

When performing a break-even analysis for a new healthcare service line, which variable represents the contribution margin?

Answer: Revenue per unit minus variable cost per unit

Contribution margin = Revenue per unit − Variable cost per unit, representing what each unit contributes toward covering fixed costs.