University of Twente Student Theses


A model to assist the real estate investment decision making process at a large academic hospital

Heikens, S.C. (2009) A model to assist the real estate investment decision making process at a large academic hospital.

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Abstract:Recent changes in the healthcare system in the Netherlands have led to a situation where hospitals bear more responsibility on their investments. So it is becoming ever more important that investments are done in a smart and efficient manner. This thesis is developed to assist the investment decision making process by constructing a model for the UMCG in which different alternatives of an investment project are analysed. The first central question focuses on the method used in the model and is the following; What is the best way to analyse investment opportunities to serve as the foundation of the model and that fits with the UMCG and its surroundings? With the use of a literature study, a comparison is made between three different methods of analysing investment opportunities, the Discounted Cash Flow (DCF), Real Options Analysis (ROA) and Direct Capitalisation (DC). The DCF method is favoured, mainly because it is accurate and easily understandable. This last argument allows the model to be used by financial and nonfinancial persons. The Net Present Value (NPV) of all possible different alternatives is given as output and is compared to each other to determine the best alternative. This NPV lists the total present value of all the cash flows during the lifespan of a project. The Weighted Average cost of Capital (WACC) is the weighted average between the cost of debt and cost of equity and is used to determine the discount factor. Calculating this for the UMCG resulted in a WACC of 6,07%. The second central question focuses on the development and working of the model itself and is the following; In which way can a model be developed that assists the decision making process for real estate projects at the UMCG? By listing all the requirements of the model, the input and output parameters become clear. The input consists out of the operational income and expenses, the initial investment income or expenses and the duration of the project. The output is given by the NPV and a sensitivity analysis to see what happens if the revenues rise of fall up to 5%. An important feature of the model is its flexibility so it can be used for real estate investments for any project within the UMCG. The model is applied to a current case where the psychiatric department for adults (UCP) and children (UCKJP) need new housing. Within this project there are three different alternatives, a completely new building, a complete renovation of the existing buildings or a combination of new building and renovation. These three alternatives are compared to each other within the model where the alternative to build a completely new building has the highest NPV and is considered the best option to proceed with. The alternative that combines renovation with building a new structure has only a slightly lower NPV and can also be considered a viable option. The complete renovation has the lowest NPV. Please note that the absolute values of the NPVs of the three alternatives contain a large degree of uncertainty, because the allocating of the Academisch Component en Rijksbijdrage (AC&R) and the overhead expenses may not be fully accurate. Any improvements that are done to make these input parameters more reliable would greatly improve the accuracy of the NPV. This lack of accuracy on the NPV is not a great problem since the main function of the model is to compare different alternatives and the uncertain input is the same for each alternative. This means that the ranking of the alternatives remains the same regardless of the height of the AC&R and overhead expenses. Another limitation is that the model can only list options that are available now, not ones that may come available in the future. This limits the number of alternatives that can be listed. Further improvements on this matter can be made by expanding the model to include option or decision trees that can list all possible options.
Item Type:Essay (Master)
Universitair Medisch Centrum Groningen
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Industrial Engineering and Management MSc (60029)
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