Case studies in finance

PARCHEGGI BRESCIA - Parking in Brescia

This case study brings together a number of interesting factors when dealing with large scale projects on a number of levels. The case involves a hospital, whose main concern is, or at least should be, its patients. Yet, hospitals often have to look into many other areas in order to operate successfully. While purchasing new equipment and keeping good doctors, nurses and other medical professional on staff is of paramount importance, the maintenance of the facility, and in this case, of adequate parking facilities, goes hand in hand with this objective.

This brings us to, Il problema del parcheggio in Brescia, the problem of parking in Brescia.

In Italy, as in many European countries, the cities themselves are conglomerates of several levels of different private and publicly owned companies that all work within the infrastructure of the city to provide services. They are also notoriously difficult to gather together to work as a whole to solve problems. Somehow, the Hospital in Brescia seems to have been able to bring several entities together to work for a worthwhile cause for the hospital and be able to profit themselves from the venture, or at least that seems to be the plan. It trying to ascertain the cohesive quality of the plan one must look at it from the hospitals point-of-view.

They certaily want to have the benefit of the spaces, but not the financial and managerial headache of constructing and maintaining them. In making the plan they have developed a strategy that appears to be in their best interests and that of the parties involved.

In the world of financial analysis one might seem to feel that that the use of NPV is more favored over IRR. The dollar value of the investment is a concrete and often quite verifiable number when making decisions about projects and future expenditures (especially if those projects have uneven time or cost variables). However, as recently noted in a Duke University Study:

Financial executives use internal rate of return (IRR) and net present value (NPV) with almost equal frequency, according to a new Duke University study. Previous studies of the corporate-finance analysis tools suggest that IRR is the dominant analytical approach. Explanation: In contrast to its predecessors, the Duke study focused on practices at a broader range of companies (IRR and NPV 2003, 2).

When the internal rate of return for the project exceeds what you would receive by lending, you will maximize wealth by making the investment, transforming current resources into future resources via direct investment rather than lending. NPV and IRR calculation are certainly highly educated deduction and invaluable tools when assessing return and risk factors associated with a project. Leveraging and debt structure are also major concerns when undertaking not only any capital investments, but in maintaining the structure and longevity of the organization as a whole. A project that has most of its cash flows in the early years, the NPV will not decline very much if the cost of capital increases, but if a project whose cash flows come in the later years it will be severely penalized by high capital costs. Similar to the risk imposed on long-term bonds and the fluctuation of interest rates. If cash flows remain unchanged and the cost of capital fluctuates, IRR can change. NPV assumes that cash flows are reinvested at the cost of capital whereas the IRR assumes reinvestment at the IRR, and it is more likely, in a competitive world, that the actual reinvestment rate is usually the cost of capital than the IRR, especially if the IRR is quite high.