Healthcare Financial Management Decision - Essay Example

The former will depend primarily on grants from Governmental or private sources such as individual and corporate donations that reward them for their efforts. For-profit institutions however depend on budgeting their time, resources and equipment in the most cost efficient manner. They charge for their services and the management of the hospital is answerable to its shareholders or owners. In this paper I have been asked to assume the role of a key individual in the finance department of a for-profit metropolitan hospital.

I have to decide between building a rehabilitation center or a neo-natal wing for the hospital. Both of these are mutually exclusive so only one can be chosen. I will use the concepts of Net Present Value (NPV), Return on Investment (ROI), and Profitability Index (PI) to decide between one project and the other. Discussion Deciding between the two projects i.e. a Rehabilitation Center or Neo-natal Wing has been made necessary because of the limited time and resources at the disposal of the hospital.

If that were not the case it would certainly benefit the hospital if both the projects were carried out. The concept of Opportunity Cost, or the cost of the next best alternative not taken, is used to justify the decision that is ultimately made. The concept of Net Present Value or the time value of money can be used to compare the present or future values of proposed project investments. In this instance there are some inflows and some outflows. Inflows of funds are represented by a positive sign and outflows of funds by a negative sign (Rao, 1989).

The total of all the inflows over the life of the project and outflows over the life of the project occurring in different years are combined and reduced to a single total representing the present value of total inflows and outflows, the Net Present Value is arrived at by deducting the present value of inflows from the present value of outflows. So NPV= Total Present Value of Inflows – Total Present Value of Outflows (Besley & Brigham, 1980). It is only commonsensical to see that any project with outflows more than inflows will give a Negative NPV and therefore must be avoided at all costs.

In terms of comparing the projects for the rehabilitation center and the neo-natal wing, we would first start by envisaging what resources would be needed for constructing a rehabilitation center, where would it be built, what would be the equipment and facilities needed, what kind of rehabilitation would the hospital cater to, whether the number of cases being reported, the cost of treatment and the success rate are all positive and encouraging enough to take this step. The number of rooms and beds, cost of equipment, medication, treatment, administration and hiring trained nurses etc.

has to be all worked out and then the proposed cost of treatment or care calculated and compared to see if a profit is indeed possible. It is also commonly seen that a project may take some time to get off the ground and be financially successful, so its payback period must be judged taking into account the inflows and outflows during the life of the project. The lesser the payback period, the better it would be for investment purposes (Heitger & Matulich, 1980). Another important thing is to estimate whether the number of patients is growing or declining for each of the options, rehabilitation or neonatal care.

Some costs will be fixed