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Understanding Return on Investment (ROI)

Master of Health Administration

Activity: – Understanding Return on Investment

Background: – The Board of Trustees at Harris Memorial Hospital and Harris Community Foundation have engaged the Certified Public Accounting Firm of Pennypacker and Vandelay, LLC to provide a series of educational presentations to the Board for purposes of assisting them in performing a Return On Investment (ROI) analysis of a capital purchase of Electronic Health Records. The managing partner of the accounting firm has asked you as a Health Service Manager with the firm to manage the engagement.

About the Engagement:

The final paper/project challenges participants in the course (Health Service Manager with Pennypacker and Vandelay) to design an educational/financial strategy for presentation to the Harris Memorial Hospital and Harris Community Foundation Board of Trustees addressing the components of a ROI analysis. The project is to be worked on in phases throughout the semester in the form of short paper presentations. The final paper (Phase 6) is set at 2,000 words, approximately 8 pages of content. Each presentation will consist of an introduction to the Board and an overview of the selected topic and will be supported by three citations/references in APA format based on the outline below:


Phase 3 Assignment:

This week’s assignment is the third component of our ROI project. The focus of this week’s short paper writing will be to consider the justification of the capital expenditure. Three key aspects should be considered: (1) Amount and type of expenditure (2) Attainment of key decision criteria (3) Detailed financial analysis.

Using pro-forma data taken from our outside reading “A Cost Benefit Analysis- Bardon, C. G., Wang, S. J., Middleton, B., Prosser, L. A., Spurr, C. D., Carchidi, P. J., et al. (2003). The American Journal of Medicine , 114.)” prepare a net present value analysis by calculating a hurdle rateprofitability index, for you capital project. Do not consider capital cost reimbursement from third-party payers in your calculation.

Finally, consider in your writing how you would factor risk such as technology change, Physician acceptance, competition from other Health Care Organization’s, accuracy of market data and volume projections associated with the capital project (see attached hurdle rate determination worksheet below) in your discount rate.

Net Present Value Discount Rate (Hurdle Rate) Determination Worksheet


The following analysis can be used to determine the NPV Discount Rate (Hurdle Rate) Determination.

  1. Risk Free Rate 6%

(free cash flows-cash flows that are available to stakeholders(e.g., equity and debt holders) after consideration for taxes, capital expenditures, and working capital needs).

  1. Adjustment for Risk
  2. Intrinsic risk of a specific business (little or no risk) 0–4%
  • Changing technology
  • Physician implications
  • Changing reimbursement
  • Hospital management expertise
  • Competition considerations
  1. Position on continuum of life cycle (low to moderate risk) 0–3%
  • Recent development, new to area
  • Established and accepted service; success predicated on

Garnering other’s market share

  1. Unique risks to the program/service (moderate to higher risk) 0-4%
  • Accuracy of market data and volume projections
  • Risk of failure to meet targeted volume
  • Sensitivity of pro forms to deviation from forecast assumptions
  • Projection and/or pay back method
  1. Projects with unacceptable risks (higher risk) 0-20%
  • Range of Discount Rates for use in determining the Net Present

Value of Future Cash Flows _______



Last Updated on February 23, 2019

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