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Four problems can affect the capital budgeting process-inflation, replacement, risk, and closure. Therefore financial managers must consider these problems carefully when making capital budgeting decisions. This article is the second of a two-part series on capital budgeting in health care. It builds on the existing level of knowledge of capital budgeting to give the financial manager confidence in the use of capital budgeting techniques.

The standard that defines quality health care rises as new technologies and procedures become available. To the health care financial manager, maintaining quality health care becomes a twofold problem--how to keep up with the latest developments while staying within budget guidelines. Two methods of analyzing capital expenditures are available to the financial manager, IRR and NPV. The latter is the safest and most reliable. NPV takes into account present market conditions and neither penalizes nor overly rewards either the buyer or seller of a particular project. This article is the first of a two-part series on capital budgeting in health care and takes the financial manager beyond the pure arithmetic of NPV and IRR to show the depth and meaning behind the arithmetic.

With the loss of the periodic interim payment (PIP), hospitals will lose the steady flow of income they have become dependent upon. However, with the use of computer simulation, hospital administrators can see how this loss could possibly affect their institutions.