HA520 Unit 8 MRI Capital Budgeting Evaluation Example

Positive by a Narrow Margin: A Capital Budgeting Evaluation of a Second MRI Scanner at a Composite Nonprofit Hospital, With Discounted Value, Return, Payback and a Sensitivity Panel Showing How Little It Takes to Turn the Project Negative

[Student Name]

Purdue University Global

HA520: Health Care Financial Management

Unit 8 Capital Budgeting Evaluation

[Instructor Name]

[Date]

The hospital, the project and every cash flow are composite and bracketed; the evaluation is a course model of capital budgeting, not an investment recommendation.

The Operating Case

The median wait for an outpatient MRI appointment has reached [19] days, and referrals from two orthopedic practices are leaving for a freestanding center that offers appointments within days (Unit 7). A second scanner would cut waits and recover lost volume.

Assumptions, With Sources

1. Scanner: [$2.4] million, vendor quote.

2. Room shielding and construction: [$1.1] million, facilities estimate.

3. Incremental scans: [2,400] in year one, [3,000] in year two, [3,300] a year after that, from referral recovery estimates and wait list data.

4. Net revenue per scan: [$486], the current MRI average after the payer shift (Unit 7).

5. Variable cost per scan: [$64], contrast and supplies.

6. Staffing: [4.0] technologist FTEs, [$487,469] a year fully loaded.

7. Service contract: [$190,000] a year from year two, after warranty.

8. Salvage value: [$250,000] at the end of year seven.

9. Discount rate: [7] percent, the hospital's cost of capital set by finance.

10. Taxes: none, because the hospital is tax-exempt.

Incremental Reasoning

The schedule counts a cash flow only if the second scanner causes it. Existing overhead, the first scanner's costs and allocated administrative expense are excluded, because they would occur with or without the second scanner. Capital budgeting rests on comparing incremental cash flows with the investment, discounted for the time value of money (Brealey et al., 2020).

The Cash Flow Schedule

Year 0: [−$3,500,000]. Year 1: [2,400] × ([$486] − [$64]) − [$487,469] = [$525,331]. Year 2: [3,000] × [$422] − [$487,469] − [$190,000] = [$588,531]. Years 3 to 6: [3,300] × [$422] − [$487,469] − [$190,000] = [$715,131] each. Year 7: [$715,131] + [$250,000] salvage = [$965,131].

Results

Net present value at [7] percent: about [$221,775]. Internal rate of return: about [8.6] percent. Payback: about [5.3] years. Payback ignores the time value of money, which is why it is reported as a secondary measure beside net present value (Datar & Rajan, 2021). The project clears the hurdle, but by only about six percent of its cost, so small errors in the assumptions can change the answer.

Sensitivity

1. At a [9] percent discount rate: net present value about [−$44,700].

2. At [80] percent of forecast volume: about [−$1,186,000].

3. At a [10] percent lower payment per scan: about [−$589,000].

All three turn the project negative. Volume is the most powerful assumption: each [ten] percent shortfall in scans costs about [$680,000] of present value.

What the Numbers Do Not Capture

Shorter waits may improve patient experience and keep orthopedic surgeons and their surgical cases at the hospital, revenue not counted here. A freestanding competitor may respond with lower prices. Medicare Advantage growth may lower the payment per scan further. Health care finance texts note that capital decisions in nonprofit hospitals often weigh mission and strategic benefits alongside financial returns, but should state those benefits explicitly rather than use them to rescue a weak project (Cleverley & Cleverley, 2018).

Why Volume Matters So Much

Each additional scan contributes [$422] after variable cost, while staffing, the service contract and the investment are fixed once the scanner is installed. When volume falls, revenue drops but most costs do not, so the margin shrinks quickly. The project has high operating risk: a large fixed base supported by a modest margin per unit. That is why volume dominates the sensitivity panel, and why securing referrals before purchase matters more than negotiating a slightly lower scanner price.

Comparing With Alternatives

Two alternatives were considered. Extending the first scanner's hours into evenings and weekends would add about [1,500] scans a year at a much lower cost, but would not cut waits enough to recover the orthopedic referrals. Partnering with the freestanding center was rejected because it would send revenue elsewhere. The second scanner remains the option that addresses the wait, but extended hours could serve as an interim step while referral agreements are negotiated.

Reducing the Risk

1. Sign referral agreements with the two orthopedic practices before purchase.

2. Lease rather than buy the scanner, lowering the upfront cost and shifting obsolescence risk.

3. Phase staffing: hire two technologists at opening and two more when volume passes [2,800] scans a year.

Recommendation

Approve the project only if the orthopedic referral agreements are signed and volume risk is reduced; otherwise defer and revisit in a year with better volume data.

Limits

Cash flows are estimates; the discount rate is set by policy. Opportunity costs of the space are not included.

Conclusion

The second scanner is a positive but fragile investment. Its value depends on volume above all, and the hospital should secure that volume before committing [$3.5] million.

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw-Hill Education.

Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.