DNP 840 Module 4 Capital Budget Request and Net Present Value Example

Build, Lease or Buy Places: A Capital Budget Request for Adult Day Respite in a Dementia Care Program

Student Name

Doctor of Nursing Practice Program, Aspen University

DNP 840: Strategic Planning and Financial Management

Instructor Name

Month Day, Year

Build, Lease or Buy Places: A Capital Budget Request for Adult Day Respite in a Dementia Care Program

Capital budgets cover purchases that last more than a year and cost more than a set threshold, such as buildings, renovations, vehicles and major equipment. Because these decisions tie up money for years, organizations compare options using methods that account for the time value of money, most commonly net present value (Finkler et al., 2013). This paper presents a capital request for adult day respite within the composite health system's dementia care program. It explains the need, describes three options, calculates each option's net present value and payback period, and recommends one.

The Need

Family caregivers in the program's first months most often asked for regular time away from caregiving, not occasional crisis help. Adult day services meet that need by providing supervised activities, meals and personal care for several hours a day while caregivers work, rest or attend to their own health. In a study comparing caregivers who began using adult day care with caregivers who did not, those whose relatives attended at least twice a week had lower caregiving stress and better psychological well-being at three months and one year (Zarit et al., 1998). A later analysis of the same study found that when adult day use reduced the hours caregivers spent managing memory problems, their feelings of role overload also fell (Gaugler et al., 2003).

The only adult day center in the service area is a nonprofit program in the largest county with a waiting list, and most enrolled families live more than 30 minutes away from it.

Three Options

Option A is to renovate a 4,800-square-foot suite in a health system building vacated when a clinic moved. Construction would cost $620,000, furnishings and equipment $110,000 and an accessible van $50,000, for a capital cost of $780,000. The center could serve 24 people a day; the plan assumes average attendance of 18 at an average payment of $78 per day from Medicaid waiver, veterans' benefits and private pay, over 250 days a year. Revenue would be $351,000 and operating costs $256,000, for a net cash inflow of $95,000 a year once the center fills, and $40,000 in the first year.

Option B is to lease a 2,600-square-foot storefront next to the program's busiest primary care practice for ten years and fit it out for $190,000 plus $50,000 in equipment, a capital cost of $240,000. With capacity for 14 and average attendance of 11, revenue would be $214,500 and operating costs, including rent, $169,500, for a net inflow of $45,000 a year and $25,000 in the first year.

Option C requires no capital. The program would pay the nonprofit center to reserve places for its families, subsidizing low-income families' attendance at a net cost of about $20,000 a year. It gives the program little control over quality, hours or location, and depends on the partner's capacity.

Net Present Value

Net present value discounts each year's expected cash flow back to today's dollars and subtracts the initial investment. A positive result means the project earns more than the organization's cost of capital; a negative result means it earns less. The analysis uses the health system's 6% cost of capital and a ten-year horizon, the length of the lease and the useful life of the renovation.

Interpreting the Results

Option A has the largest capacity and the largest yearly cash inflow, but its high capital cost means its net present value is negative: at 6%, its future inflows are worth about $133,000 less than the money spent today, and it takes almost nine years to recover the investment. For Option A to break even in present value terms, its net inflow would need to be about $116,000 a year, which would require attendance near capacity every day, more than the program's enrollment projections support in its early years.

Option B earns a positive net present value of about $72,000 and pays back in under six years. Its smaller size limits how many families it can serve, but it sits beside the practice with the most enrolled families, which should make attendance easier to sustain. Option C has the lowest risk and no capital outlay, but its negative value reflects a continuing subsidy with no offsetting revenue to the program, and it does not solve the problem of distance.

Risks and Nonfinancial Factors

The main financial risk in Option B is attendance: each person fewer in average daily attendance reduces revenue by $19,500 a year, and because most costs are fixed, average attendance of 10 instead of 11 would be enough to turn the net present value negative. Keeping places filled is therefore the first operating priority, supported by referrals from care managers and a waiting list managed by the program coordinator. Payment mix is a second risk, since Medicaid waiver rates are set by the state and could change. Among nonfinancial factors, Option B's location supports the program's equity goal because the practice beside it serves a large Spanish-speaking population, and a smaller center is easier to staff with the bilingual workers families have requested. Option B also keeps the future open: if demand exceeds its capacity, the health system can revisit Option A with real attendance data rather than projections.

Recommendation

The request is for $240,000 in capital to lease and fit out the storefront site under Option B, with a ten-year lease that includes a renewal option. The program will continue to buy a small number of places at the nonprofit center for families who live closer to it. Attendance, payment mix and caregiver-reported stress will be reported quarterly, and a formal review after two full years will decide whether demand justifies expansion.

Conclusion

Net present value analysis shows that the largest and most visible option is not the best investment: renovating the owned suite loses value at the health system's cost of capital, while a smaller leased site near enrolled families earns a positive return and pays back in under six years. Combining the financial analysis with evidence that adult day services relieve caregiver stress, and with the program's equity goals, supports a phased approach that begins small and expands on evidence.

References

Finkler, S. A., Jones, C. B., & Kovner, C. T. (2013). Financial management for nurse managers and executives (4th ed.). Elsevier Saunders.

Gaugler, J. E., Jarrott, S. E., Zarit, S. H., Stephens, M. A. P., Townsend, A., & Greene, R. (2003). Adult day service use and reductions in caregiving hours: Effects on stress and psychological well-being for dementia caregivers. International Journal of Geriatric Psychiatry, 18(1), 55-62. https://doi.org/10.1002/gps.772

Zarit, S. H., Stephens, M. A. P., Townsend, A., & Greene, R. (1998). Stress reduction for family caregivers: Effects of adult day care use. The Journals of Gerontology: Series B, 53B(5), S267-S277. https://doi.org/10.1093/geronb/53B.5.S267