[Solved] Law Week 10 Assignment- Healthcare Finance

Assignment Prompt & Instructions

**files (5)**

– ## Week10AssignmentInstructions-HealthcareFinance.docx

– ## USW1_MMHA_6400_Week10_NPV-ARR-IRR-Payback.pdf

– ## Week10LearningResources-HealthcareFinance.docx

– ## USW1_MMHA_6400_Week10_capitalBudgetTemplate.xlsx

– USW1_MMHA_6400_Week10_HowToCalculateNPVandIRR.pdf

**## Week10AssignmentInstructions-HealthcareFinance.docx**

**Week 10 Assignment**

**Healthcare Finance**

**Capital Budgeting**

There are many options to buy capital, including cash purchases, loans, leasing, and other forms of payment. Your goal as a healthcare manager is to determine which method is best for your organization, given its financial and organizational structure (i.e., for-profit or not-for-profit). Time value of money and net present value are two techniques that may help you determine how and when to invest in new capital. For this Assignment, you examine these concepts as they pertain to the healthcare industry.

**To prepare for this Assignment:**

· Review the Week 10 Assignment document provided to you by the instructor. Reflect on concepts of time value of money, net present value, internal rate of return, and purchasing options.

· To assist you with this task, a Present and Future Values Excel Tutorial has been added to this week’s Learning Resources. Please check your volume settings upon opening.

**Submit** the following:

· Complete the “Week 10 Assignment Capital Budget Excel Template” by answering the questions provided in the template.

**## USW1_MMHA_6400_Week10_NPV-ARR-IRR-Payback.pdf**

© 2022 Walden University, LLC Page 1 of 2

Net Present Value, Accounting Rate of Return, Internal Rate of Return,
and Payback to Make Investment Decisions

One decision that managers make that affects the future pertains to evaluating capital
investment opportunities. There will be outflows of cash in certain periods and inflows in
others. It is not as simple as adding up all the inflows and subtracting the outflows since
they occur at different times. For example, if the company invests $10,000 today and
will receive $10,500 in 5 years, there is a positive difference of $500. Does this mean
the investment should be made? A decision cannot be made based on this information
alone because a dollar today is worth more than a dollar received in the future.

One method that adjusts for this timing difference is discounted cash flow (DCF)
analysis, which is also called net present value (NPV). This approach has four steps.
First, identify the amount and timing of each cash flow; next, determine the discount
rate; then, calculate the present value of each cash flow; and finally, calculate the NPV
of the project (Davis & Davis, 2017).

The discount rate is determined by the organization and is based on the risk of the
project and the cost of capital. Different projects may have different discount rates. The
present value of the investment does not have to be calculated, as it is invested at time
zero. The present value of the future cash flows will need to be determined. The easiest
method is to use a spreadsheet program such as Microsoft Excel. The investment is
subtracted from the present value of the future cash flows. If the answer is positive, the
project should be considered. If it is zero or negative, it probably should not be
considered. Of course, there is no way to know precisely what the future cash flows will
be. NPV is based on an educated estimate of these values.

DCF is not the only method used to evaluate investment projects. Other methods
include payback, accounting rate of return (ARR), and internal rate of return (IRR). They
all can be useful in decision making, but it is important to also understand their
drawbacks.

The payback period is simply the time it takes for the cash inflows to equal the initial
investment. If cash inflows are equal, the payback period is the net initial investment
divided by the annual cash flow. It is expressed in years. If the cash flows are not equal,
the annual cash flows are added together until they equal the net initial investment. The
number of years, including partial years, is then computed. Each organization will have
determined the number of years to payback that is acceptable. This is a quick screening
tool that can be used prior to using more complicated methods. The limitations of this
method are that it ignores the time value of money and the cash flows that occur after
the payback period (Davis & Davis, 2017).

The accounting rate of return is another method that can be used to evaluate
investments. It is also called the return on investment (ROI). The formula is average

© 2022 Walden University, LLC Page 2 of 2

annual income from the project divided by the average annual investment in the project.
It is easy to calculate, but it can lead to an incorrect decision, as it ignores the time
value of money (Zimmerman, 2020).

The internal rate of return (IRR) is another method that can be used when considering
an investment. If the project’s IRR exceeds the organization’s cost of capital, the project
should be undertaken. The method considers the time value of money; therefore, it is
more accurate than those methods that do not consider this aspect. It is difficult and
time consuming unless a spreadsheet program is used. If there are multiple changes in
the cash flows from inflow to outflows, et cetera, the project could yield more than one
IRR (Shim et al., 2012).

When analyzing the feasibility of various alternative projects, consider all the
quantitative methods given above, but also look at qualitative factors such as location,
cultural differences, employee training needs, regulations, etc.

In summary, capital budgeting decisions should not be made in a vacuum. Gather the
metrics, the qualitative research, and talk to your team. Consider your options carefully
and make the best decision you can make after considering all available information.

References:

Davis, C. E., & Davis, E. (2017). Managerial accounting (3rd ed.). Wiley.

Shim, J. K, Siegel, J. G., & Shim, A. I. (2012). Budgeting basics and beyond (4th ed.).

Wiley.

Zimmerman, J. L. (2020). Accounting for decision making and control (10th ed.).

McGraw-Hill/Irwin.

**## Week10LearningResources-HealthcareFinance.docx**

**Week 10 Learning Resources**

**Healthcare Finance**

**Required Readings**

· Getzen, T. E., & Kobernick, M. S. (2022).
_Health economics & financing_ (6th ed.). Wiley.

· Chapter 11, “Financing and Ownership of Healthcare Providers” (pp. 207–227)

· Pink, G. H., & Song, P. H. (2020).
_Gapinski’s understanding healthcare financial management_(8th ed.). Health Administration Press.

· Chapter 4, “Time Value Analysis” (pp. 105–146)

· Chapter 6, “Debt Financing” (pp. 191–237)

· Chapter 10, “Capital Structure” (pp. 359–404)

· Abitbol, J., Munir, A., How, J., Lau, S., Salvador, S., Kogan, L., Kessous, R., Breitner, L., Frank, R., Kucukyazici, B., & Gotlieb, W. H. (2020).
[The shifting trends towards a robotically-assisted surgical interface: Clinical and financial implicationsLinks to an external site.](https://go.openathens.net/redirector/waldenu.edu?url=https://www.sciencedirect.com/science/article/pii/S2211883720300307).
_Health Policy and Technology_,
_9_(2), 157–165. https://doi.org/10.1016/j.hlpt.2020.03.003

· Eramo, L. (2021).
[40% of hospitals reconsidering traditional budgeting amid pandemic: HFMA pollLinks to an external site.](https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=bth&AN=149699148&site=eds-live&scope=site&custid=s6527200).
_HFM (Healthcare Financial Management)_,
_75_(3), 40–43.

· Garthwaite, C., Ody, C., & Starc, A. (2022).
[Endogenous quality investments in the U.S. hospital marketLinks to an external site.](https://go.openathens.net/redirector/waldenu.edu?url=https%3A%2F%2Fwww.sciencedirect.com%2Fscience%2Farticle%2Fpii%2FS0167629622000558).
_Journal of Health Economics, 84_. https://doi.org/10.1016/j.jhealeco.2022.102636

· Holcomb, A. J., & Smith, D. G. (2020).
[Hospital capital budgeting during a public health crisisLinks to an external site.](https://healthfinancejournal.com/index.php/johcf/article/view/217).
_Journal of Health Care Finance_,
_46_(4), 23–35. https://healthfinancejournal.com/index.php/johcf/article/view/217

· Mukherjee, T., Al Rahahleh, N., & Lane, W. (2016).
[The capital budgeting process of healthcare organizations: A review of surveysLinks to an external site.](https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=edswss&AN=000369043800011&site=eds-live&scope=site&custid=s6527200).
_Journal of Healthcare Management_,
_61_(1), 58–76. https://doi.org/10.1097/00115514-201601000-00011

· Rosales, C. R., Magazine, M. J., & Rao, U. S. (2020).
[Dual sourcing and joint replenishment of hospital suppliesLinks to an external site.](https://go.openathens.net/redirector/waldenu.edu?url=https://ieeexplore.ieee.org/document/8648301?arnumber=8648301).
_IEEE Transactions on Engineering Management_,
_67_(3), 918–931. https://doi.org/10.1109/TEM.2019.2895242

·
**Document:** [How to Calculate NPV and IRR (PDF)](https://waldenu.instructure.com/courses/226605/files/19547110?wrap=1) [Download How to Calculate NPV and IRR (PDF)](https://waldenu.instructure.com/courses/226605/files/19547110/download?download_frd=1)

·
**Document:** [Net Present Value, Accounting Rate of Return, Internal Rate of Return, and Payback to Make Investment Decisions (PDF)](https://waldenu.instructure.com/courses/226605/files/19547138?wrap=1) [Download Net Present Value, Accounting Rate of Return, Internal Rate of Return, and Payback to Make Investment Decisions (PDF)](https://waldenu.instructure.com/courses/226605/files/19547138/download?download_frd=1)

·
**Document:** [Week 10 Assignment Capital Budget Excel Template (Excel spreadsheet)](https://waldenu.instructure.com/courses/226605/files/19546994?wrap=1)

**Required Media**

· Hustona12. (2014, November 17).
[_Capital budgeting using Excel_ Links to an external site.](https://www.youtube.com/watch?v=3EAvWEcXO80) [Video]. YouTube. https://www.youtube.com/watch?v=3EAvWEcXO80

· Walden University, LLC. (2024).
_Present and future values Excel tutorial_ [Video file]. Walden University Canvas.
[https://waldenu.instructure.com](https://waldenu.instructure.com/)

· Walden University, LLC. (2024). What are NPV and IRR? [Video]. Walden University Canvas.
[https://waldenu.instructure.com](https://waldenu.instructure.com/)

**## USW1_MMHA_6400_Week10_capitalBudgetTemplate.xlsx**

## Template

| | | | | | | | |
| — | — | — | — | — | — | — | — |
| Problem 1 |
| | A | | B | | C | | D |
| | | | Future | | Future |
| | Present | | Value | | Value | | Future |
| | Value | | Factor | | Factor | | Value |
| a) |
| b) |
| c) |
| d) |
| Problem 2 | A | | B | | C | | D |
| | | | Present | | Present |
| | Future | | Value | | Value | | Present |
| | Value | | Factor | | Factor | | Value |
| a) |
| b) |
| c) |
| d) |
| Problem 3 |
| IRR |
| | Year | Cash Flow | Cummulative Cash Flow |
| | Year 0 |
| | Year 1 |
| | Year 2 |
| | Year 3 |
| | Year 4 |
| | Year 5 |

| IRR= | % |

| Problem 4 |
| | Excel |
| | less the investment |
| | NPV |
| Accept or do not accept the project |

| Problem 5 |
| What is the payback period for problem 3? |

| Payback period = Year before recovery + Year before cummulative cash flow/cash flow for year paid off |
| Payback period (show calculation) = |
| Payback period (show answer)= |

**USW1_MMHA_6400_Week10_HowToCalculateNPVandIRR.pdf**

This file is too large to display. [View in new window](https://www.sweetstudy.com/files/usw1-mmha-6400-week10-howtocalculatenpvandirr-pdf)

**USW1_MMHA_6400_Week10_HowToCalculateNPVandIRR.pdf**

This file is too large to display. [View in new window](https://www.sweetstudy.com/files/usw1-mmha-6400-week10-howtocalculatenpvandirr-pdf)

**## Week10AssignmentInstructions-HealthcareFinance.docx**

**Week 10 Assignment**

**Healthcare Finance**

**Capital Budgeting**

There are many options to buy capital, including cash purchases, loans, leasing, and other forms of payment. Your goal as a healthcare manager is to determine which method is best for your organization, given its financial and organizational structure (i.e., for-profit or not-for-profit). Time value of money and net present value are two techniques that may help you determine how and when to invest in new capital. For this Assignment, you examine these concepts as they pertain to the healthcare industry.

**To prepare for this Assignment:**

· Review the Week 10 Assignment document provided to you by the instructor. Reflect on concepts of time value of money, net present value, internal rate of return, and purchasing options.

· To assist you with this task, a Present and Future Values Excel Tutorial has been added to this week’s Learning Resources. Please check your volume settings upon opening.

**Submit** the following:

· Complete the “Week 10 Assignment Capital Budget Excel Template” by answering the questions provided in the template.

**## USW1_MMHA_6400_Week10_NPV-ARR-IRR-Payback.pdf**

© 2022 Walden University, LLC Page 1 of 2

Net Present Value, Accounting Rate of Return, Internal Rate of Return,
and Payback to Make Investment Decisions

One decision that managers make that affects the future pertains to evaluating capital
investment opportunities. There will be outflows of cash in certain periods and inflows in
others. It is not as simple as adding up all the inflows and subtracting the outflows since
they occur at different times. For example, if the company invests $10,000 today and
will receive $10,500 in 5 years, there is a positive difference of $500. Does this mean
the investment should be made? A decision cannot be made based on this information
alone because a dollar today is worth more than a dollar received in the future.

One method that adjusts for this timing difference is discounted cash flow (DCF)
analysis, which is also called net present value (NPV). This approach has four steps.
First, identify the amount and timing of each cash flow; next, determine the discount
rate; then, calculate the present value of each cash flow; and finally, calculate the NPV
of the project (Davis & Davis, 2017).

The discount rate is determined by the organization and is based on the risk of the
project and the cost of capital. Different projects may have different discount rates. The
present value of the investment does not have to be calculated, as it is invested at time
zero. The present value of the future cash flows will need to be determined. The easiest
method is to use a spreadsheet program such as Microsoft Excel. The investment is
subtracted from the present value of the future cash flows. If the answer is positive, the
project should be considered. If it is zero or negative, it probably should not be
considered. Of course, there is no way to know precisely what the future cash flows will
be. NPV is based on an educated estimate of these values.

DCF is not the only method used to evaluate investment projects. Other methods
include payback, accounting rate of return (ARR), and internal rate of return (IRR). They
all can be useful in decision making, but it is important to also understand their
drawbacks.

The payback period is simply the time it takes for the cash inflows to equal the initial
investment. If cash inflows are equal, the payback period is the net initial investment
divided by the annual cash flow. It is expressed in years. If the cash flows are not equal,
the annual cash flows are added together until they equal the net initial investment. The
number of years, including partial years, is then computed. Each organization will have
determined the number of years to payback that is acceptable. This is a quick screening
tool that can be used prior to using more complicated methods. The limitations of this
method are that it ignores the time value of money and the cash flows that occur after
the payback period (Davis & Davis, 2017).

The accounting rate of return is another method that can be used to evaluate
investments. It is also called the return on investment (ROI). The formula is average

© 2022 Walden University, LLC Page 2 of 2

annual income from the project divided by the average annual investment in the project.
It is easy to calculate, but it can lead to an incorrect decision, as it ignores the time
value of money (Zimmerman, 2020).

The internal rate of return (IRR) is another method that can be used when considering
an investment. If the project’s IRR exceeds the organization’s cost of capital, the project
should be undertaken. The method considers the time value of money; therefore, it is
more accurate than those methods that do not consider this aspect. It is difficult and
time consuming unless a spreadsheet program is used. If there are multiple changes in
the cash flows from inflow to outflows, et cetera, the project could yield more than one
IRR (Shim et al., 2012).

When analyzing the feasibility of various alternative projects, consider all the
quantitative methods given above, but also look at qualitative factors such as location,
cultural differences, employee training needs, regulations, etc.

In summary, capital budgeting decisions should not be made in a vacuum. Gather the
metrics, the qualitative research, and talk to your team. Consider your options carefully
and make the best decision you can make after considering all available information.

References:

Davis, C. E., & Davis, E. (2017). Managerial accounting (3rd ed.). Wiley.

Shim, J. K, Siegel, J. G., & Shim, A. I. (2012). Budgeting basics and beyond (4th ed.).

Wiley.

Zimmerman, J. L. (2020). Accounting for decision making and control (10th ed.).

McGraw-Hill/Irwin.

**## Week10LearningResources-HealthcareFinance.docx**

**Week 10 Learning Resources**

**Healthcare Finance**

**Required Readings**

· Getzen, T. E., & Kobernick, M. S. (2022).
_Health economics & financing_ (6th ed.). Wiley.

· Chapter 11, “Financing and Ownership of Healthcare Providers” (pp. 207–227)

· Pink, G. H., & Song, P. H. (2020).
_Gapinski’s understanding healthcare financial management_(8th ed.). Health Administration Press.

· Chapter 4, “Time Value Analysis” (pp. 105–146)

· Chapter 6, “Debt Financing” (pp. 191–237)

· Chapter 10, “Capital Structure” (pp. 359–404)

· Abitbol, J., Munir, A., How, J., Lau, S., Salvador, S., Kogan, L., Kessous, R., Breitner, L., Frank, R., Kucukyazici, B., & Gotlieb, W. H. (2020).
[The shifting trends towards a robotically-assisted surgical interface: Clinical and financial implicationsLinks to an external site.](https://go.openathens.net/redirector/waldenu.edu?url=https://www.sciencedirect.com/science/article/pii/S2211883720300307).
_Health Policy and Technology_,
_9_(2), 157–165. https://doi.org/10.1016/j.hlpt.2020.03.003

· Eramo, L. (2021).
[40% of hospitals reconsidering traditional budgeting amid pandemic: HFMA pollLinks to an external site.](https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=bth&AN=149699148&site=eds-live&scope=site&custid=s6527200).
_HFM (Healthcare Financial Management)_,
_75_(3), 40–43.

· Garthwaite, C., Ody, C., & Starc, A. (2022).
[Endogenous quality investments in the U.S. hospital marketLinks to an external site.](https://go.openathens.net/redirector/waldenu.edu?url=https%3A%2F%2Fwww.sciencedirect.com%2Fscience%2Farticle%2Fpii%2FS0167629622000558).
_Journal of Health Economics, 84_. https://doi.org/10.1016/j.jhealeco.2022.102636

· Holcomb, A. J., & Smith, D. G. (2020).
[Hospital capital budgeting during a public health crisisLinks to an external site.](https://healthfinancejournal.com/index.php/johcf/article/view/217).
_Journal of Health Care Finance_,
_46_(4), 23–35. https://healthfinancejournal.com/index.php/johcf/article/view/217

· Mukherjee, T., Al Rahahleh, N., & Lane, W. (2016).
[The capital budgeting process of healthcare organizations: A review of surveysLinks to an external site.](https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=edswss&AN=000369043800011&site=eds-live&scope=site&custid=s6527200).
_Journal of Healthcare Management_,
_61_(1), 58–76. https://doi.org/10.1097/00115514-201601000-00011

· Rosales, C. R., Magazine, M. J., & Rao, U. S. (2020).
[Dual sourcing and joint replenishment of hospital suppliesLinks to an external site.](https://go.openathens.net/redirector/waldenu.edu?url=https://ieeexplore.ieee.org/document/8648301?arnumber=8648301).
_IEEE Transactions on Engineering Management_,
_67_(3), 918–931. https://doi.org/10.1109/TEM.2019.2895242

·
**Document:** [How to Calculate NPV and IRR (PDF)](https://waldenu.instructure.com/courses/226605/files/19547110?wrap=1) [Download How to Calculate NPV and IRR (PDF)](https://waldenu.instructure.com/courses/226605/files/19547110/download?download_frd=1)

·
**Document:** [Net Present Value, Accounting Rate of Return, Internal Rate of Return, and Payback to Make Investment Decisions (PDF)](https://waldenu.instructure.com/courses/226605/files/19547138?wrap=1) [Download Net Present Value, Accounting Rate of Return, Internal Rate of Return, and Payback to Make Investment Decisions (PDF)](https://waldenu.instructure.com/courses/226605/files/19547138/download?download_frd=1)

·
**Document:** [Week 10 Assignment Capital Budget Excel Template (Excel spreadsheet)](https://waldenu.instructure.com/courses/226605/files/19546994?wrap=1)

**Required Media**

· Hustona12. (2014, November 17).
[_Capital budgeting using Excel_ Links to an external site.](https://www.youtube.com/watch?v=3EAvWEcXO80) [Video]. YouTube. https://www.youtube.com/watch?v=3EAvWEcXO80

· Walden University, LLC. (2024).
_Present and future values Excel tutorial_ [Video file]. Walden University Canvas.
[https://waldenu.instructure.com](https://waldenu.instructure.com/)

· Walden University, LLC. (2024). What are NPV and IRR? [Video]. Walden University Canvas.
[https://waldenu.instructure.com](https://waldenu.instructure.com/)

**## USW1_MMHA_6400_Week10_capitalBudgetTemplate.xlsx**

## Template

| | | | | | | | |
| — | — | — | — | — | — | — | — |
| Problem 1 |
| | A | | B | | C | | D |
| | | | Future | | Future |
| | Present | | Value | | Value | | Future |
| | Value | | Factor | | Factor | | Value |
| a) |
| b) |
| c) |
| d) |
| Problem 2 | A | | B | | C | | D |
| | | | Present | | Present |
| | Future | | Value | | Value | | Present |
| | Value | | Factor | | Factor | | Value |
| a) |
| b) |
| c) |
| d) |
| Problem 3 |
| IRR |
| | Year | Cash Flow | Cummulative Cash Flow |
| | Year 0 |
| | Year 1 |
| | Year 2 |
| | Year 3 |
| | Year 4 |
| | Year 5 |

| IRR= | % |

| Problem 4 |
| | Excel |
| | less the investment |
| | NPV |
| Accept or do not accept the project |

| Problem 5 |
| What is the payback period for problem 3? |

| Payback period = Year before recovery + Year before cummulative cash flow/cash flow for year paid off |
| Payback period (show calculation) = |
| Payback period (show answer)= |

**USW1_MMHA_6400_Week10_HowToCalculateNPVandIRR.pdf**

This file is too large to display. [View in new window](https://www.sweetstudy.com/files/usw1-mmha-6400-week10-howtocalculatenpvandirr-pdf)

**## Week10AssignmentInstructions-HealthcareFinance.docx**

**Week 10 Assignment**

**Healthcare Finance**

**Capital Budgeting**

There are many options to buy capital, including cash purchases, loans, leasing, and other forms of payment. Your goal as a healthcare manager is to determine which method is best for your organization, given its financial and organizational structure (i.e., for-profit or not-for-profit). Time value of money and net present value are two techniques that may help you determine how and when to invest in new capital. For this Assignment, you examine these concepts as they pertain to the healthcare industry.

**To prepare for this Assignment:**

· Review the Week 10 Assignment document provided to you by the instructor. Reflect on concepts of time value of money, net present value, internal rate of return, and purchasing options.

· To assist you with this task, a Present and Future Values Excel Tutorial has been added to this week’s Learning Resources. Please check your volume settings upon opening.

**Submit** the following:

· Complete the “Week 10 Assignment Capital Budget Excel Template” by answering the questions provided in the template.

**## USW1_MMHA_6400_Week10_NPV-ARR-IRR-Payback.pdf**

© 2022 Walden University, LLC Page 1 of 2

Net Present Value, Accounting Rate of Return, Internal Rate of Return,
and Payback to Make Investment Decisions

One decision that managers make that affects the future pertains to evaluating capital
investment opportunities. There will be outflows of cash in certain periods and inflows in
others. It is not as simple as adding up all the inflows and subtracting the outflows since
they occur at different times. For example, if the company invests $10,000 today and
will receive $10,500 in 5 years, there is a positive difference of $500. Does this mean
the investment should be made? A decision cannot be made based on this information
alone because a dollar today is worth more than a dollar received in the future.

One method that adjusts for this timing difference is discounted cash flow (DCF)
analysis, which is also called net present value (NPV). This approach has four steps.
First, identify the amount and timing of each cash flow; next, determine the discount
rate; then, calculate the present value of each cash flow; and finally, calculate the NPV
of the project (Davis & Davis, 2017).

The discount rate is determined by the organization and is based on the risk of the
project and the cost of capital. Different projects may have different discount rates. The
present value of the investment does not have to be calculated, as it is invested at time
zero. The present value of the future cash flows will need to be determined. The easiest
method is to use a spreadsheet program such as Microsoft Excel. The investment is
subtracted from the present value of the future cash flows. If the answer is positive, the
project should be considered. If it is zero or negative, it probably should not be
considered. Of course, there is no way to know precisely what the future cash flows will
be. NPV is based on an educated estimate of these values.

DCF is not the only method used to evaluate investment projects. Other methods
include payback, accounting rate of return (ARR), and internal rate of return (IRR). They
all can be useful in decision making, but it is important to also understand their
drawbacks.

The payback period is simply the time it takes for the cash inflows to equal the initial
investment. If cash inflows are equal, the payback period is the net initial investment
divided by the annual cash flow. It is expressed in years. If the cash flows are not equal,
the annual cash flows are added together until they equal the net initial investment. The
number of years, including partial years, is then computed. Each organization will have
determined the number of years to payback that is acceptable. This is a quick screening
tool that can be used prior to using more complicated methods. The limitations of this
method are that it ignores the time value of money and the cash flows that occur after
the payback period (Davis & Davis, 2017).

The accounting rate of return is another method that can be used to evaluate
investments. It is also called the return on investment (ROI). The formula is average

© 2022 Walden University, LLC Page 2 of 2

annual income from the project divided by the average annual investment in the project.
It is easy to calculate, but it can lead to an incorrect decision, as it ignores the time
value of money (Zimmerman, 2020).

The internal rate of return (IRR) is another method that can be used when considering
an investment. If the project’s IRR exceeds the organization’s cost of capital, the project
should be undertaken. The method considers the time value of money; therefore, it is
more accurate than those methods that do not consider this aspect. It is difficult and
time consuming unless a spreadsheet program is used. If there are multiple changes in
the cash flows from inflow to outflows, et cetera, the project could yield more than one
IRR (Shim et al., 2012).

When analyzing the feasibility of various alternative projects, consider all the
quantitative methods given above, but also look at qualitative factors such as location,
cultural differences, employee training needs, regulations, etc.

In summary, capital budgeting decisions should not be made in a vacuum. Gather the
metrics, the qualitative research, and talk to your team. Consider your options carefully
and make the best decision you can make after considering all available information.

References:

Davis, C. E., & Davis, E. (2017). Managerial accounting (3rd ed.). Wiley.

Shim, J. K, Siegel, J. G., & Shim, A. I. (2012). Budgeting basics and beyond (4th ed.).

Wiley.

Zimmerman, J. L. (2020). Accounting for decision making and control (10th ed.).

McGraw-Hill/Irwin.

**## Week10LearningResources-HealthcareFinance.docx**

**Week 10 Learning Resources**

**Healthcare Finance**

**Required Readings**

· Getzen, T. E., & Kobernick, M. S. (2022).
_Health economics & financing_ (6th ed.). Wiley.

· Chapter 11, “Financing and Ownership of Healthcare Providers” (pp. 207–227)

· Pink, G. H., & Song, P. H. (2020).
_Gapinski’s understanding healthcare financial management_(8th ed.). Health Administration Press.

· Chapter 4, “Time Value Analysis” (pp. 105–146)

· Chapter 6, “Debt Financing” (pp. 191–237)

· Chapter 10, “Capital Structure” (pp. 359–404)

· Abitbol, J., Munir, A., How, J., Lau, S., Salvador, S., Kogan, L., Kessous, R., Breitner, L., Frank, R., Kucukyazici, B., & Gotlieb, W. H. (2020).
[The shifting trends towards a robotically-assisted surgical interface: Clinical and financial implicationsLinks to an external site.](https://go.openathens.net/redirector/waldenu.edu?url=https://www.sciencedirect.com/science/article/pii/S2211883720300307).
_Health Policy and Technology_,
_9_(2), 157–165. https://doi.org/10.1016/j.hlpt.2020.03.003

· Eramo, L. (2021).
[40% of hospitals reconsidering traditional budgeting amid pandemic: HFMA pollLinks to an external site.](https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=bth&AN=149699148&site=eds-live&scope=site&custid=s6527200).
_HFM (Healthcare Financial Management)_,
_75_(3), 40–43.

· Garthwaite, C., Ody, C., & Starc, A. (2022).
[Endogenous quality investments in the U.S. hospital marketLinks to an external site.](https://go.openathens.net/redirector/waldenu.edu?url=https%3A%2F%2Fwww.sciencedirect.com%2Fscience%2Farticle%2Fpii%2FS0167629622000558).
_Journal of Health Economics, 84_. https://doi.org/10.1016/j.jhealeco.2022.102636

· Holcomb, A. J., & Smith, D. G. (2020).
[Hospital capital budgeting during a public health crisisLinks to an external site.](https://healthfinancejournal.com/index.php/johcf/article/view/217).
_Journal of Health Care Finance_,
_46_(4), 23–35. https://healthfinancejournal.com/index.php/johcf/article/view/217

· Mukherjee, T., Al Rahahleh, N., & Lane, W. (2016).
[The capital budgeting process of healthcare organizations: A review of surveysLinks to an external site.](https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=edswss&AN=000369043800011&site=eds-live&scope=site&custid=s6527200).
_Journal of Healthcare Management_,
_61_(1), 58–76. https://doi.org/10.1097/00115514-201601000-00011

· Rosales, C. R., Magazine, M. J., & Rao, U. S. (2020).
[Dual sourcing and joint replenishment of hospital suppliesLinks to an external site.](https://go.openathens.net/redirector/waldenu.edu?url=https://ieeexplore.ieee.org/document/8648301?arnumber=8648301).
_IEEE Transactions on Engineering Management_,
_67_(3), 918–931. https://doi.org/10.1109/TEM.2019.2895242

·
**Document:** [How to Calculate NPV and IRR (PDF)](https://waldenu.instructure.com/courses/226605/files/19547110?wrap=1) [Download How to Calculate NPV and IRR (PDF)](https://waldenu.instructure.com/courses/226605/files/19547110/download?download_frd=1)

·
**Document:** [Net Present Value, Accounting Rate of Return, Internal Rate of Return, and Payback to Make Investment Decisions (PDF)](https://waldenu.instructure.com/courses/226605/files/19547138?wrap=1) [Download Net Present Value, Accounting Rate of Return, Internal Rate of Return, and Payback to Make Investment Decisions (PDF)](https://waldenu.instructure.com/courses/226605/files/19547138/download?download_frd=1)

·
**Document:** [Week 10 Assignment Capital Budget Excel Template (Excel spreadsheet)](https://waldenu.instructure.com/courses/226605/files/19546994?wrap=1)

**Required Media**

· Hustona12. (2014, November 17).
[_Capital budgeting using Excel_ Links to an external site.](https://www.youtube.com/watch?v=3EAvWEcXO80) [Video]. YouTube. https://www.youtube.com/watch?v=3EAvWEcXO80

· Walden University, LLC. (2024).
_Present and future values Excel tutorial_ [Video file]. Walden University Canvas.
[https://waldenu.instructure.com](https://waldenu.instructure.com/)

· Walden University, LLC. (2024). What are NPV and IRR? [Video]. Walden University Canvas.
[https://waldenu.instructure.com](https://waldenu.instructure.com/)

**## USW1_MMHA_6400_Week10_capitalBudgetTemplate.xlsx**

## Template

| | | | | | | | |
| — | — | — | — | — | — | — | — |
| Problem 1 |
| | A | | B | | C | | D |
| | | | Future | | Future |
| | Present | | Value | | Value | | Future |
| | Value | | Factor | | Factor | | Value |
| a) |
| b) |
| c) |
| d) |
| Problem 2 | A | | B | | C | | D |
| | | | Present | | Present |
| | Future | | Value | | Value | | Present |
| | Value | | Factor | | Factor | | Value |
| a) |
| b) |
| c) |
| d) |
| Problem 3 |
| IRR |
| | Year | Cash Flow | Cummulative Cash Flow |
| | Year 0 |
| | Year 1 |
| | Year 2 |
| | Year 3 |
| | Year 4 |
| | Year 5 |

| IRR= | % |

| Problem 4 |
| | Excel |
| | less the investment |
| | NPV |
| Accept or do not accept the project |

| Problem 5 |
| What is the payback period for problem 3? |

| Payback period = Year before recovery + Year before cummulative cash flow/cash flow for year paid off |
| Payback period (show calculation) = |
| Payback period (show answer)= |

**USW1_MMHA_6400_Week10_HowToCalculateNPVandIRR.pdf**

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