Healthcare Finance

Healthcare Finance

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Healthcare Finance Please review

Chapter 17:

Capital Expenditure Budgets

Capital Expenditure Budgets

  • Because capital expenditures generally acquire long lasting assets, capital expenditure budgets usually involve long-term financial issues.
  • Capital expenditure budgets are also sometimes known as “capital spending plans.”

Versus Operating Budgets

  • Usually deal with short-term revenues and expenses that are necessary to operate the facility.

Creating the Budget

Capital expenditure budgets are often created in two parts:

  • Spending for assets already acquired
  • Spending for new capital assets

Budget Construction and the
Cash Flow Analysis Concept

  • A cash flow analysis illustrates how the project’s cash is expected to move over a period of time.
  • When constructing a capital expenditure budget, the cash flow analysis should be cumulative.

Cash Flow Reporting Methods

Cash flow reporting for this purpose typically uses one of four methods:

  • Payback Method
  • Accounting Rate of Return
  • Net Present Value
  • Internal Rate of Return

(All four methods are described, including an example for each, in the Appendix to the chapter.)

Budget Inputs

  • Capital Expenditure Budget Construction with Operating Budget Inputs
  • If the operating budget proposal would require additional capital equipment and/or space renovations, then capital expenditure budget inputs may have to be included to recognize the impact of these operations proposals.

Figure 17-1 Capital Expenditures Budget Inputs.

Budget Construction and
Startup Cost Concept

  • On the other hand, if the capital expenditures budget proposal includes operational expenses, management often requires that startup costs also be considered.

Funding Request Process

  • The process of funding capital expenditure requests (also known as proposals) varies case-by-case depending upon the particular organization.

Capital Expenditure Proposals

  • Acquiring new equipment
  • Upgrading existing equipment
  • Replacing existing equipment with new equipment
  • Funding new programs
  • Funding expansion of existing programs
  • Acquiring capital assets for future use

Rationing Available Capital

  • Only a limited amount of capital is usually available for capital expenditures, so rationing is necessary.
  • Three factors will probably be considered:
  • Necessity for the request
  • Cost of capital to the organization
  • Return that could be realized on alternative investments

Evaluating Capital Expenditure Proposals

  • Because rationing is necessary, evaluating the proposals is a method of allocating the available capital.
  • Evaluating capital expenditure proposals may be either subjective or objective.
  • Objective evaluation is the most desirable.

(See more details in the chapter.)

Evaluating Capital Expenditure Proposals

An objective evaluation may involve two steps:

  • Scoring all proposals received
  • Ranking the higher-scoring proposals

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