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Related Experiment Videos

Objective risk adjustment improves calculated ROI for capital projects.

R L Holmes1, R E Schroeder, L F Harrington

  • 1SRA International, Falls Church, Virginia, USA. rich_holmes@sra.com

Healthcare Financial Management : Journal of the Healthcare Financial Management Association
|January 6, 2001
PubMed
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Healthcare organizations should adjust capital costs to account for financial risk. Factoring in risk improves return on investment calculations for capital projects, ensuring better financial planning and project viability.

Area of Science:

  • Healthcare Finance
  • Capital Budgeting
  • Risk Management

Background:

  • Healthcare organizations face significant financial risks when undertaking capital projects.
  • Inadequate compensation for assumed risks can jeopardize financial stability.

Purpose of the Study:

  • To demonstrate how adjusting the cost of capital for risk can enhance financial analysis of capital projects.
  • To provide a framework for more accurate return on investment (ROI) and net present value (NPV) calculations.

Main Methods:

  • The study proposes incorporating a risk adjustment factor into the cost of capital calculation.
  • This factor is based on organizational capital structure, historical returns, and market/industry variance.

Main Results:

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  • Adjusting the cost of capital for risk leads to a more accurate assessment of project profitability.
  • Improved ROI and NPV calculations result from a comprehensive risk-adjusted financial model.

Conclusions:

  • Healthcare organizations must proactively manage financial risk in capital budgeting.
  • Implementing risk-adjusted cost of capital is crucial for sound investment decisions and long-term financial health.