Capital Planning & Investment Analysis Flashcards

A health system's capital allocation process uses a 'scoring matrix' to prioritize projects. Which criteria would be MOST appropriate to include?

Answer: Strategic fit, financial return, regulatory need, and patient safety impact

A robust capital scoring matrix balances strategic, financial, regulatory, and quality dimensions to objectively rank competing projects.

When a hospital conducts a 'post-implementation review' of a capital project, the primary goal is to:

Answer: Compare actual results to projected financial and operational performance

Post-implementation reviews hold decision-makers accountable by comparing actual outcomes to the original business case projections.

Which statement about the internal rate of return (IRR) method is a recognized limitation?

Answer: IRR assumes interim cash flows are reinvested at the IRR itself, which may be unrealistic

The IRR method implicitly assumes that interim cash flows are reinvested at the project's own IRR, which may overstate returns when the IRR is high.

A healthcare organization is considering a joint venture with a physician group to build an ambulatory surgery center. From a capital planning perspective, this structure primarily:

Answer: Shares capital investment and risk while potentially limiting full control

Joint ventures distribute capital requirements and financial risk across partners but typically require shared governance and may limit strategic control.

In healthcare capital budgeting, 'economic life' differs from 'physical life' because:

Answer: Economic life ends when it is more cost-effective to replace rather than continue operating the asset

Economic life ends when cumulative operating costs plus opportunity costs make replacement cheaper than continued operation, which may occur before physical obsolescence.

A hospital CFO presents a Monte Carlo simulation to the board for a proposed cancer center expansion. The simulation's primary benefit over simple NPV analysis is:

Answer: It models a range of probabilistic outcomes by varying multiple assumptions simultaneously

Monte Carlo simulation generates a probability distribution of outcomes by running thousands of scenarios with varying inputs, providing a richer risk picture than point-estimate NPV.

Under a Certificate of Need (CON) program, a hospital must obtain state approval before making a major capital expenditure primarily because:

Answer: CON laws are designed to control healthcare costs by preventing duplication of services

CON programs require state review of major capital projects to prevent excess capacity and duplication that could drive up healthcare costs.