Net present value rules and hospital investment decisions

Current trends in health care financing increasingly place hospitals at risk for their expenditures and financial decisions. This has generated a need for financial models which will help to insure the financial viability of non profit hospitals without compromising their non profit objectives. This paper develops a valuation based model for evaluating the acceptability of hospital investments. The model differs from net present value in that is stresses return of assets rather than return on assets as the criterion for project acceptance. This simple modification of standard NPV analysis, in turn, changes several key analytic properties of the investment model, ranging from the effect of interest rates on the ‘value’ of the project to the correct formula for calculating the weighted average cost of capital. A simple example is calculated to illustrate the use of the model and the role of financial valuation in the management of non profit hospitals is discussed more generally.