Ted Jones, the Surgery Unit Director, is about to choose his strategy for creati

Question

Ted Jones, the Surgery Unit Director, is about to choose his strategy for creating a capital expenditure funding proposal for the coming year. Ted’s unit needs more room. The Surgery Unit is running at over 90% capacity. In addition, a prominent cardiology surgeon on staff at the hospital wants to create a new cardiac surgery program that would require extensive funding for more space and for new state-of-the-art equipment. The surgeon has been campaigning with the hospital board members.

What should Ted decide to ask for? How should he go about crafting a strategy to justify his request, given the hospital’s new scoring system?

Explanation / Answer

Ted should try to hold a discussion on the following points with the board members :

1.) Why there is a need to bring this project?

2.) How modernizing is going to help the set-up?

3.) How new cardiac surgery program is going to synergize with the existing system?

4.) How this investment is going to help generate and increase revenues and bring down overall cost?

Ted should craft a strategy to put forward the funding proposal by doing cost benefit analysis using various capital budgeting tools like NPV analysis, Payback period method etc.

A.) Under NPV analysis Ted can carry out a net present value (NPV) analysis ascertaining the difference between the cost of the project (cash outflows) and the cash flows generated by that project (cash inflows). Here the future cash flows are discounted at a discount rate to ascertain the present value and in order to incorporate the cost of financing into the calculation.

B.) Through payback period method, Ted can determine how long it will take to pay back the initial investment required to implement the project. In order to calculate this, he will take the total cost of the project and divide it by expected amount of cash inflow each year; this will give him the payback period.

C.) And lastly through IRR method, Ted can determine how much return can be realized from the project. For understading, Internal rate of return is the discount rate at which the project is at break-even or NPV equals 0. Ted can choose the project if IRR is higher than the cost of financing and can reject otherwise

By using the most appropriate method of cost-benefit analysis, Ted can convince the hospital board to provide the funding for this project.

And to meet hospitals new scoring system criteria, Ted can compare the facility in terms of all relevant benchmarks like quality, safety, transparency, promptness, friendliness of staff, technological prowess etc. before and after the project acceptance.

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