Capital Rationing with Restricted Donor Funds
Bridgewell Health Trust is a fictional non-profit hospital group with NGN 850m available for capital projects. Four proposals are on the table. Project A, a dialysis unit, needs NGN 500m and has an estimated NPV of NGN 210m. Project B, a mobile clinic, needs NGN 250m and has an NPV of NGN 120m; a donor has given NGN 150m that is legally restricted to this mobile clinic. Project C, an electronic health record system, needs NGN 300m and has an NPV of NGN 90m. Project D, clinical training equipment, needs NGN 100m and has an NPV of NGN 40m. The COO wants all four approved and proposes using the restricted donation to bridge any shortfall on the dialysis unit. The finance director says the board should simply fund the highest-NPV projects. The board asks for a recommendation.
1. Recommend which projects Bridgewell should fund from the NGN 850m and explain the financial and governance reasoning.
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Recommendation. Fund A, B and D: NGN 500m plus NGN 250m plus NGN 100m equals NGN 850m, with combined NPV of NGN 370m. This is the highest feasible NPV combination in the data. A and B together use NGN 750m and leave NGN 100m, which is exactly D. C cannot be added without exceeding the envelope.
Reasoning. B has a strong claim because NGN 150m of its funding is restricted; if B is rejected, that money cannot be redirected. A has the largest absolute NPV and is core to the hospital's mission. D is smaller but uses the residual NGN 100m and supports clinical quality. C has a lower NPV per naira and should be deferred or phased, unless the board has evidence that it is a regulatory necessity. In that case, phase A or use leasing or a dedicated appeal. The board should approve stage gates, require a cash-flow and implementation plan for each project, and minute the restriction on the mobile-clinic donation. NPV ranking alone is insufficient because it ignores the restricted funding and mission risk.
2. The COO proposes using the restricted mobile-clinic donation to bridge a shortfall on the dialysis unit. How should the board respond?
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Response. The board should reject the proposal unless the donor gives prior written consent to a changed purpose and any required trustee or regulatory approval is obtained. Restricted funds are held for the specified purpose. Using them for dialysis exposes directors to breach-of-trust claims and reputational damage, and it would undermine future donor confidence. The board should instruct finance to segregate restricted funds, report them separately, and test the dialysis business case against unrestricted reserves.
If the shortfall is genuine, the options are phased dialysis capital expenditure, equipment leasing, a dedicated fundraising appeal, or deferral, not reallocation. The company secretary should minute the restriction and the board's decision. The audit committee should review controls over donor restrictions and confirm that project reporting matches the restricted purpose. The COO's proposal may be well intentioned, but governance requires the board to protect the restriction even when the alternative project has a higher NPV.