HAC Capital Planning & Investment Analysis 3 — Questions and Answers
Question 1: A healthcare system is considering replacing aging CT equipment. Which analysis best captures the financial impact of NOT replacing the equipment (opportunity cost)?
- Differential (incremental) cost analysis (Correct answer)
- Replacement cost analysis
- Historical cost analysis
- Standard cost variance analysis
Correct answer: Differential (incremental) cost analysis
Differential analysis compares the costs and revenues of keeping old equipment versus replacing it, capturing all incremental changes.
Question 2: Under the Modified Accelerated Cost Recovery System (MACRS), medical equipment classified as 5-year property receives accelerated depreciation primarily to:
- Improve early-year tax deductions and cash flow (Correct answer)
- Increase book value for lender covenants
- Simplify accounting for Medicare cost reports
- Align with the equipment's useful life exactly
Correct 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.
Question 3: 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?
- 1.83x (Correct answer)
- 1.50x
- 1.33x
- 2.17x
Correct answer: 1.83x
DSCR = (Net Income + Depreciation) / Debt Service = ($900,000 + $200,000) / $600,000 = $1,100,000 / $600,000 = 1.83x.
Question 4: In a sensitivity analysis for a capital project, which variable having the greatest impact on NPV indicates the highest risk exposure?
- The variable whose change causes the largest NPV swing (Correct answer)
- The variable with the largest absolute dollar value
- The variable that is easiest to forecast accurately
- The variable with the highest correlation to interest rates
Correct 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.
Question 5: 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:
- Tax-exempt status of bond interest income for investors (Correct answer)
- Superior credit rating of not-for-profit hospitals
- Government subsidies for not-for-profit institutions
- Lower operational risk in not-for-profit facilities
Correct 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.
Question 6: Which scenario best illustrates a 'sunk cost' in healthcare capital decision-making?
- $50,000 spent on a feasibility study before the project decision (Correct answer)
- Annual maintenance costs on proposed new equipment
- Lost revenue from closing a service line during construction
- Tax savings generated by new equipment depreciation
Correct 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.
Question 7: A healthcare organization applies a 'hurdle rate' to capital projects. Which best describes how this rate is typically established?
- Weighted average cost of capital (WACC) plus a risk premium (Correct answer)
- The prime lending rate plus inflation
- The organization's historical return on assets
- The minimum return required by the board of directors, set arbitrarily
Correct 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.
HAC Capital Planning & Investment Analysis 3
A healthcare system is considering replacing aging CT equipment.
Which analysis best captures the financial impact of NOT replacing the equipment (opportunity cost)?