X-ray Machine Investment at Central Carolina Hospital

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Executive summary

Central Carolina Hospital’s management team has decided to buy a new model X-ray machine and replace the existing machine. This is a capital investment undertaken by the company whose benefits are expected to surpass the investment cost. Total investment costs are in terms of acquisition costs and operational costs (Anon, 2001). Benefits will be derived from internal and external customers. The machine will also result in social benefits as it is expected to raise the standards of medical facilities in the locality. The duration that the machine is expected to be in good operational form is five years and will have a scarp value of £440,000.

When the values have been interpolated using project analysis methods like social benefit analysis, Net value method, and payback method, the venture is seen as viable since it will result in both monetary and social benefit to the hospital. Maintaining high standards and improving the health of the community is the main agenda of the hospital shareholders and manager; it also goes in line with the hospital’s vision and mission statement. When the machine is acquired, it will fulfill the objectives and vision of the hospital.

Budgeting for the X-ray machine

When budgeting for an asset, two sides must be considered; the gains and the costs involved in the acquisition. Capital budgeting in a hospital setting has two benefits they are;

Monetary gain; this is the gain that the hospital is going to get in terms of financial returns from the project. The major source of this benefit is from the collection of customers and referral cases. There are other benefits like capital investment reliefs that the hospital is likely to get from the government.
The next benefit that the hospital is likely to accrue from the project is a social benefit. This is the benefit that is attributed to better services to patients and the general welfare of society. Social costs cannot be given a monetary value but the truth is they exist and should be considered when buying the machine (Hefeker, 2006).

In most cases, the purchase of assets in a hospital is through a leasing agreement. This may offer a lee-way of lack of accountability on the part of the hospital management since the initial cost of a project is spread over a period however accounting standards demand that rents be charged as the acquisition cost of an asset. In a leasing agreement rent payable is spread over a certain period and accounted as costs of the project for budgeting purposes (in the case of Central Carolina Hospital the machine will be bought on a cash basis).

Costs of the project take two aspects; opportunity cost and the actual cost of the machine whether it is a one-off cash payment or it’s in the form of rents. There is also the opportunity cost foregone when deciding on buying a new X-ray machine. There are also operational costs that the machine will have to incur; this is in terms of salaries of operator’s maintenance, fixed costs and any upgrading if so needed by the machine (Certa, Enea, Galante, & Manuela La Fata, 2009).

When making a budget, using a life cycle method of accounting for costs is paramount. This method puts in place both incidental and operational costs in a project for a better analysis of the cost situation in the project.

When making a budget the following information is important

Cost information
Benefits information
General maintenance information
Prior performance and
Risk elements of the project

All the above may not be included in a single budget framework but they should be reflected when making the budget.

A medical facility is slightly different when evaluating it than other industries projects since there is the social factor that it aims at fulfilling. A hospital can be looked at as having two sets of objectives; these are financial objectives and social objectives. Both carry the same weight and thus an evaluation should consider that despite that social objectives cannot be quantified in money worth (Bryde & Wright, 2007).

Pro forma summary sheet showing the net revenue and cost impact of purchasing this item

The pro-forma summary sheet is an interpolation of all cost that is estimated to be incurred in the project and all benefits that will be incurred in a project. For the invoice to give a better analysis of the project there is a need to use the discounted figure in this case with 10% as the cost of capital. It offers a one-look analysis of the project to see whether the project is valuable or not. The challenge with a Pro-forma summary sheet is that it does not show social costs and benefits. It only interpolates those benefits and costs which can be quantified in monetary terms (Cooke-Davies, Crawford & Lechler, 2009).

years	costs in “000”	Benefits in “000”	Net benefit/loss
Year 0	6000	0	(6000)
Year 1	500	1963	1463
Year 2	500	2479	1979
Year 3	500	2630	2132
Year 4	500	2986	2486
Year 5	500	2794	2294
Total Net benefit of the project	8500		12852 4352

References

Anon. (2001). Budget Issues: Agency Data Supporting Capital Project Funding Requests Could Be Improved: GAO-01-770. GAO Reports, 1.

Bryde, D., & Wright, G. (2007). Project Management Priorities and the Link With Performance Management Systems. Project Management Journal, 38(4), 5-11. Web.

Certa, A., Enea, M., Galante, G., & Manuela La Fata, C. (2009). Multi-objective human resources allocation in R&D projects planning. International Journal of Production Research, 47(13), 3503-3523. Web.

Cooke-Davies, T., Crawford, L., & Lechler, T. (2009). Project management systems: Moving project management from an operational to a strategic discipline. Project Management Journal, 40(1), 110-123. Web.

Hefeker, C. (2006). Project Aid or Budget Aid? The Interests of Governments and Financial Institutions. Review of Development Economics, 10(2), 241-252. Web.

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X-ray Machine Investment at Central Carolina Hospital

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