University of Virginia Health System The Long-Term Acute Care Hospital Project Harvard Case Solution & Analysis

PROBLEM STATEMENT

Larry Fitzgerald who is the Vice President of University of Virginia Health System, is looking for a project proposal to put before the board on the next morning’s meeting. He has planned to initiate a project of new long term acute care hospital. He had also proposed the same project in the year 1999. The reason for board’s rejection was that if that at that time the regulations required the LTAC facility to be built within the structure of hospital, which could have raised disputes among medical service units. However, now things have changed and he is motivated to propose this project. But, he is not sure whether the board will approve this project or not as the idea of LTAC hospitals was new in the nonprofit sector.

Fitzgerald had also identified a number of advantages of this facility such as resolving of capacity issues, outstanding services, pleasant atmosphere and also financially attractive. However, now the problem lied in estimating the worth of this project and how much return this project could generate for the whole nonprofit organization and could it generate excess return over the average cost of capital. However, another problem also laid in the fact that there is a difference between for-profit and for nonprofit organizations. The mission of for-profit organizations is to generate wealth for its shareholders, however, the mission in nonprofit organizations is to work for the welfare of the society and the state. However, it also has to work efficiently to meet its return benchmarks and that costs are also minimized with maximum value for money. He had to work on the certainty of cash flows and all the assumptions made, so that he could put a strong proposal in front of his board.

SITUATION ANALYSIS

The financial analyst of the organization, Mulroney had prepared a memo to guide the proposed project in front of the board in the next morning’s meeting. However, the memo shown in the exhibit 1, makes it clear that a lot of assumptions have been incorporated by the financial analyst. He is not sure about what discount rate to use for the project. The utilization rate for the hospital had been assumed by him for all the 10 years. However, these could vary depending on the service provided and the patients word of mouth. Apart from that certain assumptions have also been made regarding the net revenue, such as he is not sure about the number of commercial payers and other payers. This could have a serious impact on the projects viability.

Assumptions have also been made regarding the variable operating expenses of the hospital. These could also vary. Apart from that, the financial analyst is not sure what discount rate to use, how to incorporate working capital and whether to incorporate it or not and how to deal with the interest expense paid on the 30 year mortgage loan. The case presents with all this information. Therefore, all assumptions will have to be backed up by concrete reasons.

The approval of this project by the board strongly depends on how stringent are the assumptions that support the project. Also the project should meet the minimum acceptable profit margin of the organization that is 5%. Apart from that, proper working is to be shown about how much cash flows this project is going to generate, what would be the IRR of the project under the given assumptions and also under the worst case scenario. It would also be shown how the company will cover the interest payments from its generated cash flows and are there any risks that the project would fail.

MAJOR STRATEGIC ALTERNATIVES

Looking at the current scenario presented before us, Fitzgerald has two alternatives. He has the choice either to propose the LTAC project to the board next morning or he might not propose it. Fitzgerald has planned to put this proposal ahead of the board for the second time, because the first time this project was rejected by the board on the grounds of disputes that might have occurred due to the prevailing regulations at that time. However, these regulations have now changed and now there seems to a good scope for this project. There are many problems however, that need to be addressed and the assumptions also need to be made on valid grounds so that the project actually becomes successful and is also approved by the board. If this project goes ahead, it would bring a lot of difference to the reputation and financial stability of the U. Va Health System.................................

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