Case UVa Health System: The Long-Term Acute Care Hospital
Project

Wk 3 is the first of two consecutive weeks on CAPITAL
BUDGETING.

You will learn the three steps in capital
budgeting:

1 Identify relevant incremental cash
flows

2 Calculate cost of capital (k-wacc) to use as the
discount rate

3 Calculate the metrics of capital
budgeting: Net Present Value, Profitability Index,

Internal Rate of Return, and Payback
Period.

Then, you will apply the metrics and information in the
case study to make a
recommendation

whether to accept or reject the LTAC
project.

The essence of the capital budgeting process is to make
sure, BEFORE an investment is
made,

that its prospective rate of return is high enough to
justify the investment.

Reading Cohen Finance Workbook chapter 4 is a review of
Time Value of Money, which you covered in a previous
course.

Review it as necessary, but defer the review until you
look at the TVM applications in chapter 5 beginning on p
79.

You need to know TVM to understand the capital
budgeting metrics of NPV, PI, and IRR. Make sure
you

have that context in mind before reviewing the TVM
chapter 4 (only if you need to).

Give the Uva Health Care System: The Long-Term Acute
Care Hospital Project Case a quick read to understand what is going
on – about

calculating k-wacc and the decision metrics for the
project, to give it either a green light or a red
light.

Wk 3 gives you practice on the basics. You won’t
have a full understanding of what the LTAC Project case is about
at

the end of Wk3. In Wk4, you will return to the
case, analyze the project, and make a
recommendation.

Look at the Wk 3 assignment questions in the Q1, Q2, Q3
tabs.

Read Cohen Finance Workbook chapter 5
selectively. Focus on:

See the FLOW DIAGRAM in GREEN depicting the
CAPITAL BUDGETING template.

See the IS/BS Model in GREEN depicting the
connection between PPE (BS) and operating expense
(IS).

Read pps 61-65 as a general introduction to
capital budgeting.

Read pps 70-76 on weighted average cost of
capital to answer Q1.

Read bottom p 67 to 69 on Net Working Capital to
answer Q2.

Read pps 79-85 on NPV, PI, IRR, PP to answer
Q3.

Questions

See tabs for Q1, Q2,
Q3

THESE QUESTIONS MUST BE ANSWERED USING
EXCEL.

MAKING CALCULATIONS OUTSIDE THE SPREADSHEET AND
ENTERING THE RESULTS IS NOT USING
EXCEL.

YOU MUST USE EXCEL FORMULAS FOR MAKING
CALCULATIONS!

Case UVa Health System: The LATC Hospital
Project

Wk 4 is the second of two weeks
on CAPITAL BUDGETING

Study the Wk 3 Solutions
Template before proceeding into Wk
4.

Learning Objectives (repeated from Wk3 Assignment
Template)

You will learn the three steps in capital
budgeting: SEE THE FLOW DIAGRAM – YOU
ARE NOW WORKING ON THE GREEN-COLORED
ANALYSIS.

1 Identify relevant incremental cash
flows

2 Calculate cost of capital (k-wacc) to use as the
discount
rate

3 Calculate the metrics of capital
budgeting: Net Present Value, Profitability Index,

Internal Rate of Return, and Payback
Period.

Then, you will apply the metrics and information in the
case study to make a
recommendation

about which of the two projects to
accept.

The essence of the capital budgeting process is to make
sure, before an investment is
made,

that its prospective rate of return is high enough to
justify the
investment,

i.e., that the project is CREATES value, not DESTROYS
value.

Directions (some repeating from Wk3 Assignment
Template)

1 Make a quick scan through the LTAC case and the
exhibits.

2 Listen to the Intro
Audio

3 Cohen Finance Workbook chapter 4 is a review of Time
Value of Money, which you covered in a previous
course.

Review it as necessary, but defer the review until you
look at the TVM applications in chapter 5 beginning on p
79.

You need to know TVM to understand the capital
budgeting metrics of NPV, PI, and IRR. Make sure
you

have that context in mind before reviewing the TVM
chapter 4 (only if you need
to).

4 Read the case again, to grasp all the details,
especially the Mulroney memo to her
boss.

5 To understand how a capital budgeting template works,
follow the step-by-step procedure in the book, pages
61-70

6 Scan pages 70-76 on weighted average cost of capital.
No need to emphasize at this point because discount rates are given
in the
case.

7 Read pages 79-84 on NPV, PI, IRR,
PP.

8 Pages 83-85 show a worked-out example of a capital
budgeting
decision.

Questions

If you work with a group, write answers on your own,
independently. Group answers violate academic integrity
requirements.

1 See Q1 tab. Scroll down until you see the
questions. Capital Budgeting
Template The template calculates FREE CASH
FLOW=[EBIT-TAX+DEPREC]+/-CHANGE
NWC+/-CAPEX.

2 See Q2 tab. Scroll down until you see the
questions. K-wacc
The 1st term is income statement data; the 2nd & 3rd terms are
balance sheet data.

3 See Q3 tab. Scroll down until you see the
questions. Sensitivity
Analysis LEARN THIS FORMULA (EQUATION)
COLD

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