Question

Exercise 6 - Time Value of Money Please complete the following: 1) read the case study on pp. 242-243 of the Weikart textbook and then answer the four questions near the bottom of p. 243, 2) assignment 11.1 on p. 244, and 3) assignment 12.1 on pp. 263-264 In the case study, you should end up with four different cost-benefit analyses along with a summary recommendation. For assignments 11.1 and 12.1, complete the calculation in Excel and then summarize your answer to each question in 1-2 sentences either below the calculation or in Word. CASE STUDY: COST-BENEFIT ANALYSIS FOR A NONPROFIT HOSPITAL CONSIDERING ADOPTING NEW TECHNOLOGY As a part of proposed health care reform, the federal government is encouraging hospitals to use new health information technology as a means to reduce health care costs and increase quality of services. You are the CFO of a nonprofit hospital and Reed to conduct a cost-benefit analysis of the idea to present to the board. Being well trained in economic evaluation, especially cost-benefit analysis, you have happily accepted the challenge of this task Aild ns, You have collected some relevant information. You know that the new system will enable the hospital staff to make more timely diagnoses and interventions. will reduce medical errors, and will improve communication within the care team. The initial start-up cost for your hospital is estimated to be $10 million, which includes planning, purchasing of information systems (hardware and soit- ware), and staff training, among other things, You also estimate that the operat- ing and maintenance cost of the new system will be about $1 million. After the System is implemented, the hospital is expected to benefit financially from cost savings and revenue enhancement. It is estimated that cash inflow will increase by $2.4 million. The information system will be obsolete in about ten years, and no residual value is expected. The improved quality of diagnosis and appropriate ereatment will also have broader social and human consequences. Studies show that for hospitals similar in size to yours, the system has saved an average of two lives because of reduction of errors, plus a likely decrease in injuries and long- the st, at is c- as o- on A. di d. term disabilities to patients. Based on the information collected, and following the steps outlined above, you decide to study the matter from the perspectives of both the hospital finan- cials and the larger social impact. In consultation with the CEO and other key personnel, you specify the current hospital status quo as the basis for compari- son, which dictates that all costs and benefits are incremental from that of cur- in rent practice of the organization. Working with your evaluation team, you identify key impacts, such as cost savings and increased revenue, to be included in the benefit accounting when studied from the hospital perspective. From the Societal perspective, the benefit includes the lives saved. You search the literature S - the statistical value for a human life. You could borrow money, through municipal bond with the help of the local government, at the 4 percent real interest rate. You decide to use this as the dis- count rate in the analysis. You also decide to conduct a sensitivity analysis, in which you change the discount rate to 8 percent, in case you need to borrow from the financial markets directly. If the net present value of the analysis is positive at either discount rate, you will have more confidence of the robustness of the results. What do you find in your base case cost-benefit analysis-that is, from the hospital perspective and using 4 percent as the discount rate? Changing the dis- count rate to 8 percent, what is your conclusion in your sensitivity analysis? And what is the result if you conduct the cost-benefit analysis from the societal per- Spective under the 4 percent and the 8 percent discount scenarios? What is your ecommendation to the CEO with regard to the adoption of the new system? t should be noted that this case is a simplified analysis of the very complex issue of hospital investment in adopting advanced health care information and decide to use $7 million as technology. For instance, there are many other costs and benefits that are not included in this study. We present this case here to give you practice in the step- by-step application of cost-benefit analysis in nonprofit organizations. The case is educational and illustrative in nature, and you are advised to delve deeper into other impacts of such a project on the hospital, the locality, and the society at large in the real application of this economic evaluation technique

Answer 1

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