First, consider some basic background information concerning the differences between not-for-profit organizations and investor-owned firms. What is social value? How can the net present value method be modified to include the social value of proposed projects?

Question

Sandra McCloud, a finance major in her last term of college, is currently scheduling her placement interviews through the university's career resource center. Her list of companies is typical of most finance majors: several commercial banks, a few industrial firms, and one brokerage house. However, she noticed that a representative of a not-for-profit hospital is scheduling interviews next week, and the position--that of financial analyst--appears to be exactly what Sandra has in mind. Sandra wants to sign up for an interview, but she is concerned that she knows nothing about not-for-profit organizations and how they differ from the investor-owned firms that she has learned about in her finance classes. In spite of her worries, Sandra scheduled an appointment with the hospital representative, and she now wants to learn more about not-for-profit businesses before the interview.
To begin the learning process, Sandra drew up the following set of questions. See if you can help her answer them.

Answer 1

Social values are those benefits realized from capital investment in addition to cash flow returns, such as charity care and other community services. When the social value of a project is considered, the total net present value of the project equals the standard net present value of the project's expected cash flow stream plus the net present social value of the project. This requires the social value of the project provided over its life to be quantified and discounted back to year 0. There is much subjectivity in this process, but it is prudent for not-for-profit businesses to consider the net present social value of projects under consideration as part of their standard capital budgeting procedures.