Capital Budgeting
There are five strategic projects that are available for Superior Health System. The system lost money last year, but it does have a contingency fund. Whether it is worth dipping into that fund, or other avenues of financing, depends on the strength of these projects. So it is important to analyze the projects.
Partner with a major supplier who will guarantee price, delivery, and product quality
Expand the ENT, Plastic, Gynecology, and Orthopedics surgical programs
Develop a cost-reduction program.
Spend $3,000,000 to expand primary care physician membership in Corinth Health Systems, SHS's PHO
The rational for this order is as follows. Financially, the first two options are positive. Partnering with a major supplier, if it costs nothing up front and delivers that sort of value, should have been done yesterday. Expanding the ENT, gynecology and orthopedics departments has the highest up front cost, and while that might be a barrier for management to overcome, this option is expected to generate substantial revenues in subsequent years, more than enough to pay for the up-front cost, even with two years.
The third option, the cost-reduction program, is another one that should be done. There is an up-front cost, but it is believed that over the course of a few years, the cost reductions will result in savings significantly beyond the up-front investment.
From a capital budgeting perspective, neither the Henry Street School option nor the primary care option should be undertake. There is nothing in the primary care option that points out how this will generate incremental cash flows for Superior, so it is out. Running a day care is an entirely different business, so that should be entered into with caution and only if it projects to be wildly profitable. It does not -- instead it is estimated that it will not be able to generate any contribution margin, thus not cover fixed costs nor pay back on the building purchase. Both of these options, as they reduce the overall value of the organization, should be rejected.
b. The finance committee's evaluation seems reasonable on some points, silly on others. Corporate debt is usually...
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