Module 4: Introduction to the Capital Analysis Tool powered by Kaufman Hall
Key Model Input Parameters
Armed with basic financial knowledge and data on the environmental factors that may affect your institution, you’re ready to jump into the Kaufman Hall capital analysis model. The Capital Analysis Tool powered by Kaufman Hall is set up with a series of screens that must be completed with financial or environmental data. Each screen focuses on specific data sets of information. The screens are;
Project Summary Information Capital Cost Information – This factor is the assumed discount rate, or what your organization sees the cost of capital to be. Capital cost is a mixture of the borrowing rate for debt, and equity. The factor is used to calculate the net present value of the project based on your capital structure. It is not an interest rate from external sources. Most Finance or Planning departments will be able to give you this number.
Sales/Property Tax – If your state charges sales tax against your institution’s revenue or property, you will need to enter these as percentages. It is used to calculate the tax paid on your institution’s income. If you don’t know, they can be obtained from your Finance department. Sales and property taxes will generally not be charged to not-for-profit hospitals. Not-for-profit hospitals make up about 85% of the hospitals in America.
Project Capital Investment Capital Investments - In this section it is important to know what costs can be capitalized (considered a capital investment). You should ask questions to your Finance department such as:
Can Engineering and consulting fees be capitalized as part of the cost of a new facility?
How much working capital is reasonable for this project? (Working capital is the amount of money in support materials, labor and overhead needed in the early stages of the project).
What is a reasonable amount to estimate for contingencies? (Contingencies are project dollars to cover potential cost increases).
In many of the investment areas listed, look at the historical costs of similar projects to calculate a fair estimate of the investment cost. Remember: Capital investments (Fixed Assets) show up on the balance sheet as an asset.
Average Useful Life – Average useful life, is the expected life of the assets in which you plan to invest and is used to calculate depreciation for the assets. The “other” category is an estimation of the life of Engineering, Consulting, and Information Systems. Average useful life can be found in the AHA guide or from your GEHFS representative. If in doubt, use the economic life (how long the asset will be depreciated) from your Finance department. You should ask questions to your Finance department such as:
For new construction, does the Finance department consider it a long-term (15-40 years) investment, or is it a short-term, five year investment? This will impact how fast the investment is depreciated.
Remember: Depreciation shows up on the income statement as an expense item.
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