HAC Capital Planning & Investment Analysis 2 — Questions and Answers
Question 1: 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?
- Only Project A should be accepted (Correct answer)
- Only Project B should be accepted
- Both projects should be accepted
- Neither project should be accepted
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.
Question 2: Which capital budgeting method is most appropriate when a healthcare organization faces severe capital rationing and must rank mutually exclusive projects?
- Profitability Index (PI) (Correct answer)
- Payback Period
- Accounting Rate of Return
- Gross Revenue Analysis
Correct answer: Profitability Index (PI)
The Profitability Index ranks projects by value created per dollar invested, making it ideal under capital constraints.
Question 3: 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?
- 3.75 years (Correct answer)
- 4.25 years
- 5.00 years
- 6.00 years
Correct answer: 3.75 years
$300,000 ÷ $80,000 per year = 3.75 years payback period.
Question 4: In healthcare capital planning, 'strategic alignment' refers to:
- Ensuring capital projects support the organization's mission and long-term goals (Correct answer)
- Matching debt maturity to asset life
- Balancing equity and debt financing
- Aligning depreciation methods with IRS schedules
Correct 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.
Question 5: 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:
- $24,000 positive (Correct answer)
- $24,000 negative
- $160,000 positive
- $160,000 negative
Correct answer: $24,000 positive
PV of annuity ($110,000 at 7% for 6 years) ≈ $524,000; NPV ≈ $524,000 − $500,000 = +$24,000.
Question 6: Which type of capital lease requires the lessee to record the asset and corresponding liability on its balance sheet?
- Finance lease (capital lease) (Correct answer)
- Operating lease
- Sale-leaseback arrangement
- Equipment rental agreement
Correct 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.
Question 7: When performing a break-even analysis for a new healthcare service line, which variable represents the contribution margin?
- Revenue per unit minus variable cost per unit (Correct answer)
- Total revenue minus total fixed costs
- Net income divided by total units
- Fixed costs divided by total revenue
Correct 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.
HAC Capital Planning & Investment Analysis 2
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?