Larry Fitzgerald, the vice president for business development and finance for the University of Virginia Health Systems, is preparing a proposal to the U. Va. board members to construct a new long-term acute care (LTAC) facility. An LTAC is designed for patients whom require hospital stays of 25 days or more. Recently the U. Va. had been facing capacity issues with an inadequate number of beds. The hospital would gain an additional 25 bed days per patient transferred to the LTAC, thus increasing revenues from patient’s insurance and increasing patient care. Fitzgerald’s previous proposal for the LTAC facility in 1999 was declined by the board. Although recent regulation put a halt to new construction of LTAC facilities beginning in January 2007, Fitzgerald was determined to convince the board of the value the investment would provide. The board required certain restrictions with new capital investments. First, a 5.0% profit margin as the minimum on new investments, …show more content…
Attachment 1 provides the net revenues and expenses carried over to the discounted cash flow analysis in Attachment 2 & 2A. Under the loan funded scenario, net present value is $45.9 million with an internal rate of return at 27%. Under corporate debt funding (AA rated), NPV is much higher at $74.8 million with an IRR of 30.24%. The cost of capital in each scenario is strictly the cost of debt (corporate or loan), because the U. Va. is a nonprofit and they do not have an equity cost. Profit margins of both figures exceed the minimum required 5% with the exception for year 1. Under conservative metrics, such as utilization (Attachment 4), NPV is $25.4 million, and in a reduction of commercial payers (Attachment 4A), NPV is $28.4 million. In either scenarios, the NPV, IRR and net profit margin exceed the costs of the initial investment for the