Granite Valley Medical Center |
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Finance/Financial Management |
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Intermediate |
7 |
Available.
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$9.00
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I don’t object to the priority given to medical
equipment by the board. At the same time, though, requests for
administrative or support service capital frequently have significant
cost-saving potential, and should not continue to be overlooked. There
must be some way to assess these requests on their merits without
infringing on the hospital’s ability to provide the best possible
patient care.
The speaker was Dee Anne Willis, CEO of Granite
Valley Medical Center (GVMC). She was expressing concern that in her 12
years at the hospital, both administration and support services
typically had taken a back seat in the capital budgeting process. This
concern was of particular importance to Allen Klein, GVMC’s newly hired
chief financial officer, who faced several decisions regarding the
hospital’s capital budgeting process. His decisions needed to be made
quickly since the medical center was just weeks away from the October
15 deadline to submit both operating budgets and capital requests.
Mr. Klein already had been approached by various
senior managers in the hospital regarding their department requests for
capital purchases. All had welcomed him with friendly greetings,
followed immediately by informal presentations of their departments’
proposed capital improvements. It did not take long for Mr. Klein to
realize that he needed to understand better how the capital budgeting
process worked, both formally and informally.
BACKGROUND
GVMC was a 330-bed tertiary care hospital in a
mid-sized Canadian city, located several hours from two major urban
centers. Established in the 1930s, GVMC had grown with support from
provincial revenues. It also had issued bonds on several occasions to
finance large expansions and improvements. Recent financial statements
are contained in Exhibit 1.
GVMC served a regional patient base of over one
million. It was the only regional hospital, and one of only two in the
province with facilities in cardiology, oncology, and neurology. Its
specialty in these fields included teaching and research as well as
clinical care. It prided itself on its state-of-the-art technology and
overall medical expertise. In fact, it was widely regarded for the
innovative work and research conducted by its medical community,
particularly in the neurological and oncological sciences.
The Current Capital Budgeting Process
Mr. Klein was delighted to find that the hospital’s
available funds for capital purchases had grown at a rate of about 10
percent per year during the past 5 years. How the funds were
distributed, however, was not so clear. The process began in each
service area, where individuals submitted requests to their department
head for new and replacement equipment and machinery. Capital requests
included items costing $1,000 or more. Anything under $1,000 was
included as an operating expense by the department. Once all new
requests had been received by department heads, they were reviewed and
ranked, and then ranked again incorporating all requests outstanding
from the previous year. At that point, any requests not deemed
necessary by the department were dropped from the list.
Assignment:
1. What are the key elements of GVMC’s strategy?
2. Why does the existing capital budgeting system need to be changed?
3. How do you think the two projects will fare under
Mr. Klein’s new capital budgeting technique? As part of your
assessment, calculate each
project’s net present value (NPV) and internal rate of return (IRR).
Then fill out Exhibit 2, and comp-
lete Exhibit 3.
4. Assuming only one project can be accepted, which one should it be? Which one do you think will be accepted?
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