Capital Budgeting Project / Paper

Based on CASE 26.2 Dollars and Cents versus a Sense of Ethics

Grizzly Community Hospital in central Wyoming provides health care services to families living
within a 200-mile radius. The hospital is extremely well equipped for a relatively small,
community facility. However, it does not have renal dialysis equipment for kidney patients.
Those patients requiring dialysis must travel as far as 300 miles to receive care.

Several of the staff physicians have proposed that the hospital invest in a renal dialysis center.
The minimum cost required for this expansion is $4.5 million. The physicians estimate that the
center will generate revenue of $1.15 million per year for approximately 20 years. Incremental
costs, including the salaries of professional staff and depreciation, will average $850,000
annually. Grizzly is exempt from paying any income taxes. The only difference between annual
net income and net cash flows is caused by depreciation expense. The center is not expected to
have any salvage value at the end of 20 years.

The administrators of the hospital strongly oppose the proposal for several reasons: (1) They do
not believe that it would generate the hospital’s minimum required return of 12 percent on
capital investments; (2) they do not believe that kidney patients would use the facility even if
they could avoid traveling several hundred miles to receive treatment elsewhere; (3) they do not
feel that the hospital has enough depth in its professional staff to operate a dialysis center; and
(4) they are certain that $4.5 million could be put to better use, such as expanding the hospital’s
emergency services to include air transport by helicopter.

The issue has resulted in several heated debates between the physicians and the hospital
administrators. One physician has even threatened to move out of the area if the dialysis center is
not built. Another physician was quoted as saying, “All the administrators are concerned about is
the almighty dollar. We are a hospital, not a profit-hungry corporation. It is our ethical
responsibility to serve the health care needs of central Wyoming’s citizens.”

Instructions
Complete (as clarified below):
a. Financial factors and measures.

b. Nonfinancial factors such as (1) ethical responsibility, (2) quality of care issues, (3)
opportunity costs associated with alternative uses of $4.5 million, (4) physician morale, and
(5) whether a community hospital should be run like a business.

c. Measures that could be taken to check for overly optimistic or pessimistic estimates.

Clarification:

Part (a): To be completed in Excel with formula driven answers so that all answers can be traced
for correctness.
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 Compute Payback Period, ROI and NPV - Show all calculations for the supporting
calculations. I will need to be able to see/trace all computations.

Parts (b) & (c): Based on the instructions:

 You will write a persuasive "argument" paper in your role as either a hospital
administrator or physician, your choice.
 This paper is expected to be approximately 2-3 pages, double spaced.
 Grammar, spelling, completeness counts.
 While this will not need to be in strict APA format (no need for running head, title page,
etc), outside research will be expected in order meet the goals of answering the questions.
Any outside research will, of course, be both referenced and cited.

Assume:

The potential investment in the Dialysis center will be brought before the board, where you will
have a chance to state your case.
 Summarize the investment and address both the financial factors you found in part (a)
 and any non-financial factors (as suggested in part b and/or others you found interesting
and pertinent).
 Per part c, you also should address any concerns the board might have about the validity
of the estimates, and what might be available to them to be assured they are fairly
presented.

Remember that your goal is to apply and "sell" the accurate financial and non-financial evidence
that will sway the board to invest or not invest, depending on the role you have
chosen. Remember that although results of numbers are strong, the non-financial factors can be
powerful, as well.

See Grading Rubric, below.

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 Rubric:
Criteria: Exceptional (A) Good (B) Fair (C) Poor (D)

(93-100 points) (83-92 points) (73-82 points) (60-72 points)

Excel worksheet: Each of the 3 formulas Each of the 3 formulas 1-2 of the 3 formulas 0 of the 3 formulas
included calculations calculated correctly, calculated correctly calculated correctly, or calculated correctly, or
of Payback Period, ROI formatted well, in a the answers are the answers are
and NPV professional presented as presented as
(10%) worksheet. “plugged” numbers “plugged” numbers
Paper Formula results are Formula results are Formula results are Formula results are
Analysis of formulas provided and fully provided and provided, but not well provided, not
for the investment explained and explained and explained or analyzed explained or analyzed
(30%) analyzed with a full analyzed with a with an understanding
understanding of their minimal understanding of their import.
import. of their import.
Non-financial factors Several non-financial Several non-financial One or two non- One or two non-
(25%) factors were factors were financial factors were financial factors were
introduced, cited, introduced, explained introduced, explained introduced, explained
explained in a way that in a way that made in a way that made in a way that was hard
made sense, and sense, and supported sense, and supported to make sense of, and
supported the position the position taken. the position taken. did not support the
taken in a logical position taken.
manner.
Outside research Thorough support of Support of reasoning, Support of reasoning, No support of
(20%) reasoning, backed with backed with research backed with research reasoning
research on topic. 3 or on topic. 2-3 cited, on topic. 1 cited,
more cited, referenced referenced sources referenced source
sources
Overall writing, APA, Well-written, concise, Average writing & Not written well, poor Poor writing, poor
grammar, etc. professional, good appearance, free of appearance, contains content, incomplete,
(15%) spelling & grammar, obvious spelling and spelling or grammar contains many spelling
easy to read, good grammar errors. errors or grammar errors
flow

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