I don’t object to the priority given to medical equipment
by the board of directors. 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 that these requests can be assessed on their merits
without infringing on the hospital’s ability to provide the best
possible patient care.
The speaker was DeeAnne Willis,
CEO of Green 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
Ms. Willis’ 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 departmental directors
were 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 Mr.
Klein with friendly greetings, followed immediately by informal
presentations of their departments’ proposals for new innovative
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.
was a 330-bed nonprofit teaching hospital affiliated with a large state
university in a mid-size town located several hours from the state’s
two urban centers. Established in the 1930s with a federal grant, Green
Valley had grown with continuous support from state revenues. It also
had issued municipal revenue bonds on several occasions to finance
large expansions and improvements. Recent financial statements are
contained in Exhibit 1.
Green Valley served a regional patient
base of over one million. It was the only regional hospital, and one of
only two in the state, with facilities in cardiology, oncology, and
neurology. Green Valley’s 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, the
hospital 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
research acquainted Mr. Klein with the current capital budgeting
process at Green Valley. He was delighted to find that the hospital’s
available funds for capital purchases had . . .
- What are the key elements of GVMC’s strategy?
- Why does the existing capital budgeting system need to be changed?
would the two projects fare under the proposed technique? As part of
your assessment, calculate each project’s net present value (NPV) and
internal rate of return (IRR) and fill out Exhibit 2. Then complete
- Assuming only one project can be accepted, which one should it be? Which one do you think will be accepted?