I have some of the details we need to get started on our NPV analysis.

The Board of Directors
First, let me give you a little background that I think might help you understand how this hospital is run. Woodland Ridge is a for-profit hospital owned by a large company. This parent company owns hospitals all over the United States. Each of those hospitals has a Board of Directors to oversee it. This Board of Directors is a group of very experienced business and healthcare professionals who work with the hospital’s leaders to make sure the hospital makes decisions that help them achieve their goals.

Oliver Bennett, the CEO, is the only member of the Board who deals with Woodland Ridge hospital on a day-to-day basis. His primary responsibility is to help Woodland Ridge hospital grow and make money. In this case, he decided that the Hospital needed to make a capital investment, so he worked with his team, people like Dr. Kathleen Solomon and the others you met in the kick-off meeting, to put the investment proposals together.

Once your analysis is complete and you make a recommendation to the Board of Directors they will decide which project they will fund. We already know Mr. Bennett favors the CyberKnife, but his vote isn’t the only one that counts. The entire Board of Directors has a say in which project is funded.

In addition to deciding which project will be implemented, the Board of Directors has another important role in this process. The Board decides what interest rate to charge on each project. The interest rate is called cost of capital. The cost of capital reflects the risk the Board associates with an option. If they think the option is fairly safe, then the cost of capital is low. If, however, they think there is a big risk associated with a project, then the cost of capital will be higher. The higher the risk is then the higher the cost of capital will be.

Your Job
I talked to Mr. Bennett, who told me that the Board of Directors has set cost of capital at a minimum of 3%. They haven't taken risk into account for any of the projects yet. They asked us to help them with that, but we'll get to that in a little later. First, here’s what I’d like you to do:

1. Using the information you have calculated so far, calculate the Present Values for each year of the four investment projects.


2. Determine the Net Present Value of each project.


3. Take some time to think about the work you have done and jot down some notes for your final presentation.Remember it’s always easiest to capture ideas about your work while it is fresh in your mind. Make sure you can explain the work you did, the results your analysis produced and what those results mean.

This is an important calculation. This is the point in our analysis where it all starts coming together. Soon we’ll be able to really see which project is the most financially rewarding for this hospital. I look forward to reviewing your work.

Thanks,

Abby

Abigail Vincent
Sr. Consultant
WJL Consulting