For multihospital systems, scenario analysis has both advantages and disadvantages. Assess whether the advantages or disadvantages are greater. Assess whether financial analysis
For multihospital systems, scenario analysis has both advantages and disadvantages.
- Assess whether the advantages or disadvantages are greater.
- Assess whether financial analysis should or shouldn’t play a dominant role in capital budgeting decisions.
- Provide reasons for and evidence in support of your responses.
Comment on the postings of two of your classmates. Is your assessment the same or different? Why or why not?
Your initial posting should be addressed at 300-500 words.
Week 5 Lecture 2.html
Project Risk Analysis
Capital budgeting risk analysis includes three elements: defining the relevant risk, assessing that risk, and incorporating the assessment into the decision process. In capital budgeting, financial risk is related to uncertainty about a project's profitability. If any of the forecasted cash flows are not known with certainty, the project's forecasted profitability is uncertain and hence risk is present. As in all investments, risk is the primary determinant of a project's required rate of return (discount rate). Different types of project risk can be defined and, at least in theory, measured: Stand-alone and Corporate. The risk that is relevant to a particular analysis depends on the situation at hand. Stand-alone risk assumes that the project will be operated in isolation and hence ignores any portfolio effects. It is measured by the amount of uncertainty in forecasted profitability—the greater the uncertainty, the greater the risk. Corporate risk concerns the risk that a project brings to the organization as a whole. The risk may be small or large, but it is best if it is within the average range of risk of all the projects undertaken by the corporation. Risk is always inherent in any project, but there are ways to limit the risk. Risk can be limited by transference to another party by way of insurance. Taking steps to reduce the risk and share it with another party, such as a community fund that guarantees a certain participation rate, can mitigate it.
It will always be unwise for a leader to enter into any project without knowing the risks and assessing them as a part of the decision-making process. Some projects have more risk than others. When choosing which projects to fund, the manager should take into account the social value of each project and the ability to limit the risk.
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Week 5 Lecture 3.html
Risk Analysis Techniques
Risk analysis of standalone projects in HCOs can be complex. Two methods are commonly used, and they are relatively simple to use. Sensitivity analysis examines a project's value based on things such as the change in net present value brought by given changes in an input variable such as the volume of items sold. Here is an example. You want to buy an x-ray machine and determine the sensitivity of its net present value based on the number of procedures you expect to do per day, with a low, a medium, and a high valuation. Scenario analysis is another tool and works somewhat like a spreadsheet. When you make reasonable changes to the inputs, such as income, it is easy to see the likely net value under that condition. In many situations, a low, a medium, and a high version of the input is sufficient to cover the likely circumstances. The low and high versions might also be termed least likely and most likely, respectively. An example might be returns using 4%, 6%, and 8% as scenarios. When these tools are used to determine the best case or most likely case for the profitability of projects, it is possible to estimate the value of the project and compare it to the cost of capital to the organization. It is common today to find that there are more projects than there is funding for projects, so it is important to know how to get the best bang for your buck.
Lastly, we turn our attention to capital investment decisions, or how those funds can be deployed (spent) in the most financially efficient manner. The overall process of choosing capital investments is called capital budgeting. Perhaps the most critical part of capital budgeting is cash flow estimation because the financial value of proposed projects is the cash flows they are expected to produce. The basic concepts of capital budgeting include how to estimate a project's cash flows and how to measure its expected financial impact. Like all investment decisions, risk plays a critical role. We will learn how to assess the risk of a project as well as how to incorporate that assessment into the capital budgeting decision process
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Week 5 Lecture 3.html
Risk Analysis Techniques
Risk analysis of standalone projects in HCOs can be complex. Two methods are commonly used, and they are relatively simple to use. Sensitivity analysis examines a project's value based on things such as the change in net present value brought by given changes in an input variable such as the volume of items sold. Here is an example. You want to buy an x-ray machine and determine the sensitivity of its net present value based on the number of procedures you expect to do per day, with a low, a medium, and a high valuation. Scenario analysis is another tool and works somewhat like a spreadsheet. When you make reasonable changes to the inputs, such as income, it is easy to see the likely net value under that condition. In many situations, a low, a medium, and a high version of the input is sufficient to cover the likely circumstances. The low and high versions might also be termed least likely and most likely, respectively. An example might be returns using 4%, 6%, and 8% as scenarios. When these tools are used to determine the best case or most likely case for the profitability of projects, it is possible to estimate the value of the project and compare it to the cost of capital to the organization. It is common today to find that there are more projects than there is funding for projects, so it is important to know how to get the best bang for your buck.
Lastly, we turn our attention to capital investment decisions, or how those funds can be deployed (spent) in the most financially efficient manner. The overall process of choosing capital investments is called capital budgeting. Perhaps the most critical part of capital budgeting is cash flow estimation because the financial value of proposed projects is the cash flows they are expected to produce. The basic concepts of capital budgeting include how to estimate a project's cash flows and how to measure its expected financial impact. Like all investment decisions, risk plays a critical role. We will learn how to assess the risk of a project as well as how to incorporate that assessment into the capital budgeting decision process
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A multihospital system is two or more hospitals owned, leased, sponsored, or contract managed by a central organization (Madison, 2004). This week’s discussion will focus on multihospital systems and scenario analysis and whether the advantages or disadvantages are greater. It will also assess whether financial analysis should or shouldn’t play a dominant role in capital budgeting decisions.
Scenario analysis is when you estimate the expected value of a portfolio after changes such as interest rates have changed to unfavorable value (Hayes, 2022). Scenario analysis is done by computing rates of invested returns, once these are computed it shows if there are differentiated changes in the amounts of the portfolio in different situations. One of the biggest advantages of scenario analysis is that it shows different scenarios or outcomes within an examination allowing managers to identify risks, it also allows them to do testing. The disadvantage of scenario analysis is having assumptions that are not correct and having analysis that are way off the grid (Hayes, 2022). When conducting scenario analysis there can be biases so the analysis should be looked at in all situations to check for accuracy.
Financial analysis should play a dominant role in capital budgeting decisions. It is a long-term plan that outlines the financial demands of an investment, development, or major purchase (Pinkasovitch, 2022). Capital budgeting is something that adds value to an organization through proper preparation of operational company budgets and planning. Having a 12-month layout for the company is what this plan should entail but leads to a longer-term goal. When projecting these goals, they are set to certain projects within the organization, so they need capital budgeting to assess risks, plan, and predict challenges before they occur (Pinkasovitch, 2022).
References
Hayes, A. (2022). Investopedia: Scenario Analysis: How it Works, Examples and FAQs. https://www.investopedia.com/terms/s/scenario_analysis.asp
Madison, K. (2004). Multihospital system membership and patient treatments, expenditures, and outcomes. Health Serv Res. 39(4 Pt 1):749-69. doi: 10.1111/j.1475-6773.2004.00256.x. PMID: 15230926; PMCID: PMC1361036. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1361036/#:~:text=The%20AHA%20defines%20a%20multihospital,managed%20by%20a%20central%20organization.
Pinkasovitch, A. (2022). Investopedia: Capital Budgeting: What It Is and How It Works. https://www.investopedia.com/articles/financial-theory/11/corporate-project-valuation-methods.asp#:~:text=Capital%20budgeting%20is%20important%20because,by%20its%20owners%20or%20shareholders.
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Melissa student 2
Scenario analysis is a technique that incorporates likely outcomes based on changes in variables and their associated impact with an investment decision (Gapenski & Reiter, 2016). While scenario analysis is a widely beneficial technique to use for decision-making it does not come without disadvantages. First, advantages of this technique include the ability for future planning. Instead of drawing ideas and decisions from a blank canvas, this technique allows decision-makers to see possibilities of an investment. These include various inputs that could occur with the investment based on projection, and previous occurrences. This technique also allows the user to identify the risks associated with the investment opportunities and determine if the company can afford the possible losses (South University Online, n.d.a). Because the scenario analysis provides several scenarios, it provides detailed information and insight about the options and the possibilities that could occur, even the most unfavorable situations.
On the other hand, because of the high uncertainty in the future, this technique has the potential to provide all scenarios that are incorrect compared to the actual outcome of the investment opportunity. Also, because multihospital systems are highly complex it can be difficult to accurately predict the possible outcomes. Lastly, this technique (as with most others) is limited to the amount of information it can provide in aiding decision makers.
Financial analysis should definitely play a role in the capital budgeting decision-making process. However, for multihospital systems, the goal is not necessarily financial optimization, but offering high-quality health care at cost-effective prices (Gapenski & Reiter, 2016). While financial analysis should play a large part in decisions to ensure the healthcare organization is able to operate and function financially, it should not be the dominant role. Many factors will come into play when deciding on an investment project in a healthcare organization. As a multihospital healthcare organization, some decisions may include taking on financial investments that have poor profitability simply for the betterment of the community’s health (Gapenski & Reiter, 2016). Like the example explained in this week’s assigned reading, purchasing an expensive radiology machine, without much profitability in the long run, is a decision that is made for solely for the purchase of saving lives in the community which is a main mission and purpose of the organization (South University Online, n.d.b).
References
Gapenski, L. C., & Reiter, K. L. (2016). In Healthcare Finance: An introduction to accounting & financial management. essay, Health Administration Press
South University Online. (n.d.b) Capital Projects. https://myclasses.southuniversity.edu/d2l/le/content/101647/viewContent/5101181/View
South University Online. (n.d.a) Risk Analysis Techniques. https://myclasses.southuniversity.edu/d2l/le/content/101647/viewContent/5101183/View
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