EDN 816 Module 5 Capital Budgeting Decision Example

Ten More Chairs: A Capital Budgeting Decision on Expanding a Hospital Infusion Center, and the Risk the Numbers Hide

Student Name

Doctor of Education Program, Aspen University

EDN 816: Financial Management in Healthcare Environments

Instructor Name

Month Day, Year

Ten More Chairs: A Capital Budgeting Decision on Expanding a Hospital Infusion Center, and the Risk the Numbers Hide

Linden Ferry Medical Center's outpatient infusion center runs 14 chairs at close to full capacity, and patients with cancer, inflammatory bowel disease and multiple sclerosis now wait up to three weeks for a first appointment. The director of oncology nursing has proposed adding 10 chairs in adjacent space at a cost of $3.6 million. Because the hospital's aging plant limits how much it can spend (Module 2), every capital request must show its financial return alongside its benefit to patients. This paper evaluates the proposal with the standard tools of capital budgeting: incremental cash flows, discounting to present value, the internal rate of return and payback, and then tests the result against the risks most likely to change it.

The Capital Request

The $3.6 million request includes $2.4 million for construction, $0.6 million for chairs, pumps and furnishings, $0.2 million for information systems and $0.4 million of contingency. The equipment has a useful life of about 10 years, the period used for the analysis, with an expected salvage value of $50,000 at the end. As a nonprofit, the hospital pays no income tax, so the analysis uses cash flows before tax, and depreciation matters only as an accounting expense, not as a tax shield.

What the Project Changes

The analysis counts only the cash that the project adds or removes. The added chairs would allow about 3,000 more visits in the first year, 4,200 in the second and 5,200 a year from the third year onward, an estimate drawn from today's waiting list and the growth in referrals. Each visit adds an estimated $310 of contribution margin: net revenue for drug administration and the facility, and for drugs, minus the variable costs of supplies and drug acquisition. Commercial patients supply much of that contribution, and national research links higher markups over cost to greater hospital profitability (Bai & Anderson, 2016), which is one reason payers scrutinize hospital-based infusion. Estimating contribution per visit well also depends on knowing each visit's real cost, which activity-based methods measure more precisely than charge-based ratios (Keel et al., 2017). Operating the expansion adds $520,000 a year in fixed costs, mostly four registered nurses and a pharmacy technician. Existing overhead, such as administration, is excluded because it would not change.

The Cash Flow Table

The table sets out the annual cash flows and their present values at a discount rate of 7%, the hospital's estimated cost of capital.

Three Measures of Return

Discounted at 7%, the expansion's net present value comes to about $3.19 million: after returning the investment and a 7% annual return on it, the expansion adds that much value to the hospital in today's dollars. The internal rate of return, the discount rate at which net present value falls to zero, is about 21.4%, three times the cost of capital. Cumulative cash flows turn positive during the fifth year, a payback of about 4.2 years. By all three measures the project is attractive, and on those numbers alone the finance committee would approve it.

The Risk the Numbers Hide

The most important risk lies outside the building. Commercial insurers increasingly steer infusions away from hospital outpatient departments to physician offices, home infusion and freestanding infusion centers. A matched analysis of 52,760 infusions for commercially insured adults in 2022 and 2023 found outpatient costs 41.9% higher in hospital outpatient departments than in alternative sites, with no significant difference in serious adverse events (Cullen et al., 2026). Findings like these give payers reason to require lower-cost sites, and Linden Ferry's two largest commercial payers have already announced site-of-care policies for several drugs. If more infusions move away, or payments per visit fall, the contribution margin per visit will shrink.

Sensitivity Analysis

The analysis therefore tests two assumptions. If volume stops growing at 4,200 added visits a year, the net present value falls to about $1.57 million. If contribution per visit falls 20%, to $248, because of lower payments or a shift in drug mix, the net present value falls to about $1.10 million. If both happen together, the net present value becomes about negative $190,000, and the project would not return its cost of capital. The project is robust to either risk alone but not to both at once.

Nonfinancial Factors

Capital decisions in health care are never purely financial. Waits of three weeks for a first infusion delay treatment for patients with cancer and chronic disease, and some are traveling to a cancer center an hour's drive away. The expansion would also relieve nurses who now start infusions late into the evening to keep up. Against these benefits, the hospital must weigh fairness to patients whose care is less expensive at another site; if an office or home infusion is safe and cheaper for a patient, the hospital should not resist it only to protect its margin.

Alternatives Considered

The oncology director considered extending hours in the existing 14 chairs, which would add about 1,800 visits a year at almost no capital cost but would require evening staffing that has been hard to fill. She also considered partnering with a home infusion company for suitable patients. Neither alternative alone clears the waiting list, but both reduce the risk of overbuilding if payers move volume away.

Recommendation

The hospital should approve the expansion in two stages. In the first stage, build six chairs, with the space and utilities prepared for ten, and extend hours in the current center; in the second, add the remaining four chairs if first-year volume and contribution per visit meet the plan. The staged approach preserves most of the benefit to patients, reduces the capital at risk while payer policies settle, and gives the hospital a clear decision point based on actual results rather than forecasts.

Conclusion

On its base-case numbers, the infusion center expansion is an excellent investment: a net present value near $3.2 million, a return of about 21% a year on the money invested and a payback of just over four years. The sensitivity analysis shows why that is not the whole story, since falling volume and payers' site-of-care policies together would erase the return. A staged expansion answers both the patients waiting for treatment and the risks the base case hides.

References

Bai, G., & Anderson, G. F. (2016). A more detailed understanding of factors associated with hospital profitability. Health Affairs, 35(5), 889-897. https://doi.org/10.1377/hlthaff.2015.1193

Cullen, D., Gordon, A. S., Adkins Svoboda, S., Alvarez, M., & Cobb, R. (2026). Infusion therapy patient outcomes are similar at reduced costs in alternative sites of care compared with hospital outpatient departments: A matched cohort analysis of infusion therapy across multiple chronic conditions. Journal of Managed Care & Specialty Pharmacy, 32(3), 312-322. https://doi.org/10.18553/jmcp.2025.25264

Keel, G., Savage, C., Rafiq, M., & Mazzocato, P. (2017). Time-driven activity-based costing in health care: A systematic review of the literature. Health Policy, 121(7), 755-763. https://doi.org/10.1016/j.healthpol.2017.04.013