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NPV IRR Calculations With Initial Cost (1)

The document outlines the costs and benefits associated with the implementation of an Anesthesia Information Management System (AIMS) over a ten-year period, detailing annual costs and total benefits. It presents a total cost of $784,000 against total benefits of $1,645,806, resulting in a positive net present value (NPV) of $10,340,552 and an internal rate of return (IRR) of 202%. The analysis emphasizes the importance of considering cash flows, capital spending, and the time value of money in the decision-making process for hospital operations.

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16 views

NPV IRR Calculations With Initial Cost (1)

The document outlines the costs and benefits associated with the implementation of an Anesthesia Information Management System (AIMS) over a ten-year period, detailing annual costs and total benefits. It presents a total cost of $784,000 against total benefits of $1,645,806, resulting in a positive net present value (NPV) of $10,340,552 and an internal rate of return (IRR) of 202%. The analysis emphasizes the importance of considering cash flows, capital spending, and the time value of money in the decision-making process for hospital operations.

Uploaded by

pahaj4135
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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Cost

Annual cost Annual cost Annual cost Annual cost


Cost Component YR0 YR1 YR2 YR3
OR Workstations 112000 20160 20160 20160 20160
OR Software 140000 25200 25200 25200 25200
Office Workstations 15000 2700 2700 2700 2700
Office Software 30000 5400 2700 2700 2700
Infrastructure 15000 2700 2700 2700 2700
Server 32000 5760 5760 5760 5760
Consulting and Integration 340000
Training 100000
Total Cost 784000 61920 61920 61920 61920

Benefits
Drug Savings 294400 294400 294400 294400
Other Savings 920000 920000 920000 920000
Increase in Reimbursement 431406 431406 431406 431406
Total Benifits 1645806 1645806 1645806 1645806

PROJECT CASH FLOW -784000 1583886 1583886 1583886 1583886

NPV 10340552
IRR 202%
Annual cost Annual cost Annual cost Annual cost Annual cost Annual cost
YR4 YR5 YR6 YR7 YR8 YR9
20160 20160 20160 20160 20160 20160
25200 25200 25200 25200 25200 25200
2700 2700 2700 2700 2700 2700
2700 2700 2700 2700 2700 2700
2700 2700 2700 2700 2700 2700
5760 5760 5760 5760 5760 5760

61920 61920 61920 61920 61920 61920

294400 294400 294400 294400 294400 294400


920000 920000 920000 920000 920000 920000
431406 431406 431406 431406 431406 431406
1645806 1645806 1645806 1645806 1645806 1645806

1583886 1583886 1583886 1583886 1583886 1583886


Assumptions:

Cost of Capital = 7%
Years = 10

Hospital Operations:

Revenue = $71,901,048
OR Revenue (% of Total) = 40%
Procedures = 9,200
Operating Rooms = 14
Office Locations = 3
People to be Trained = 100

Benefits:

Drug Savings per Case = $32


Other Savings per Case = $100
Increase in Reimbursement = 1.5%

Costs:

OR Workstation = $8,000
Office Workstation = $5,000
Software per Workstation = $10,000
Infrastructure = $15,000
Maintenance per Year = 18%
Consulting = 200% of Software
Training per Person = $1,000
Server = $32,000
The business decision to purchase an AIMS takes into account the net present value (NPV) of daily cash flows, the total cost of
calculations. Total cost of ownership and ROI are limited by their exclusion of the time value of money and a bias against long-
ownership focuses on training, maintenance, and technical support costs, which are uncertain and difficult to estimate. Capita
discounted cash flow method [3]. Net present value estimates the value of the AIMS's projected future cash flow as if the cash
operating activities is calculated using the change in net working capital, operating cash flow (OCF), and capital spending [4]. T
inventory, accounts receivable, and accounts payable. Operating cash flow is estimated from the cost savings in anesthetic-rel
hospital reimbursement increases. Capital spending includes the cost of the AIMS software, servers, workstations, routers, and
capital spending. Consider the Memorial Healthcare System, which performs 9,200 procedures in 14 ORs and generates $71,9
adopting an AIMS at 17 workstations within the OR, postanesthesia care unit, and business office. An approximation of the ne
is determined by considering published estimated figures. Operating rooms account for approximately 40% of a hospital's reve
drug costs, a $100 per case cost savings, and a 1.5% increase in hospital reimbursement were observed following installation o
Cost estimates for the AIMS software, servers, workstations, routers, and cables are proposed [9]. Assuming that net working
AIMS generates a cost savings to the Memorial Healthcare System of $1,643,860 per year and a capital cost of $312,000 (Tabl
the purchase would add $523,655 in value to the Memorial Healthcare System (Table 3).

Category Details Amount


Operating Cash Flow
Anesthetic-related drug costs 9,200 cases/year × $32/case $294,400
Money per case 9,200 cases/year × $100/case $920,000
Hospital reimbursement $71,910,048 × 0.4 × 0.015 $431,460
Total Cost Savings per Year $1,643,860
Capital Spending
Operating Room Workstations $8,000 × 14 Operating Rooms $112,000
AIMS and Server Software (OR) $10,000 × 14 Workstations $140,000
Recovery Room & Office Workstations $5,000 × 3 Workstations $15,000
AIMS and Server Software (Office) $10,000 × 3 Workstations $30,000
Routers/Switches/Cables $15,000
Total Capital Investment $312,000
aily cash flows, the total cost of ownership (TCO), and return on investment (ROI)
money and a bias against long-term investments, respectively. Total cost of
and difficult to estimate. Capital budgeting decisions should be based on the
d future cash flow as if the cash flows were available today. The NPV of daily
OCF), and capital spending [4]. The elements of change in net working capital are
he cost savings in anesthetic-related drug costs, monetary savings per case, and
rvers, workstations, routers, and cables. Table 1 lists the determinants of OCF and
in 14 ORs and generates $71,901,048 in revenue. Senior managers are considering
ce. An approximation of the net present value to the Memorial Healthcare System
ximately 40% of a hospital's revenue [5]. A $32 per case reduction in anesthetic
observed following installation of an intraoperative data management system [6-8].
[9]. Assuming that net working capital remains unchanged by the purchase, an
a capital cost of $312,000 (Table 2). The NPV of the AIMS is positive, indicating that

Determinants of cash flow and capital spending

Determinants of cash flow and capital spending

1. Operating cash flow


i. anesthetic-related drug costs:
• number of cases per year
ii. money per case:
• number of cases per year
iii. hospital reimbursement:
• gross revenue
2. Capital spending
i. number of operating room work stations
ii. number of office work stations
iii. estimate of routers/switches/cables

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