Capital Planning & Investment Analysis Flashcards

A healthcare system is considering replacing aging CT equipment. Which analysis best captures the financial impact of NOT replacing the equipment (opportunity cost)?

Answer: Differential (incremental) cost analysis

Differential analysis compares the costs and revenues of keeping old equipment versus replacing it, capturing all incremental changes.

Under the Modified Accelerated Cost Recovery System (MACRS), medical equipment classified as 5-year property receives accelerated depreciation primarily to:

Answer: Improve early-year tax deductions and cash flow

MACRS front-loads depreciation deductions, reducing taxable income and improving cash flow in early project years.

A hospital's capital committee requires a minimum Debt Service Coverage Ratio (DSCR) of 1.5x for new projects. A proposed project generates $900,000 annual net income with $200,000 depreciation and requires $600,000 in annual debt service. What is the DSCR?

Answer: 1.83x

DSCR = (Net Income + Depreciation) / Debt Service = ($900,000 + $200,000) / $600,000 = $1,100,000 / $600,000 = 1.83x.

In a sensitivity analysis for a capital project, which variable having the greatest impact on NPV indicates the highest risk exposure?

Answer: The variable whose change causes the largest NPV swing

Sensitivity analysis identifies critical variables by measuring how much NPV changes when each variable is altered, highlighting the greatest risk drivers.

A not-for-profit hospital issues tax-exempt revenue bonds at 4.5% to fund a new wing. A for-profit competitor borrows at 6.5%. This difference in borrowing cost primarily reflects:

Answer: Tax-exempt status of bond interest income for investors

Investors accept lower yields on tax-exempt bonds because interest income is not subject to federal income tax, lowering borrowing costs for eligible issuers.

Which scenario best illustrates a 'sunk cost' in healthcare capital decision-making?

Answer: $50,000 spent on a feasibility study before the project decision

Sunk costs are past expenditures that cannot be recovered regardless of the decision; they should be excluded from capital analysis.

A healthcare organization applies a 'hurdle rate' to capital projects. Which best describes how this rate is typically established?

Answer: Weighted average cost of capital (WACC) plus a risk premium

The hurdle rate is typically the WACC adjusted upward for project-specific risk, ensuring projects earn enough to satisfy all capital providers.