Community General Hospital
Community General Hospital has enjoyed a history of success in attracting and maintaining solid patient volumes. Part of their success has been a balanced program of capital equipment purchases to benefit both the care provided to patients and continued new purchases and replacement of equipment.
The total dollars expend on equipment purchases for the last four years are as follows
2011 $3,500,000
2012 4,200,000
2013 4,050,000
2014 4,150,000
It is estimated by management that the amount of money to be spent on capital equipment in 2015 will be $ 4,550,000.
A tentative list of requested equipment is presented in Exhibit A. Based on what you have read and studied about capital budgeting:
COMMUNITY GENERAL HOSPITAL
EXHIBIT A
Type of Equipment Cost
1. Nuclear Medicine Camera $ 325,000
2. MRI 1,500,000
3. Computer System Laboratory 285,000
4. Patient Information System 585,000
5. Pharmacy Distribution System 387,000
6. Clinical Information System Nursing 867,000
7. New Loading Dock – Materials Management 248,000
8. Air Conditioning – West Wing 489,000
9. Hospital Beds - 30 45,000
10. Echocardiogram Equipment 450,000
11. IV Pumps – 40 55,000
12. Communications Equipment 355,000
13. Chemical Analyzer – Laboratory 988,000
14. Transportation Vans – Food Service 75,000
15. Transport Containers – Food Service 45,000
16. Information Systems Equipment (Computers) 278,000
17. Operating Room Tables & Equipment 765,000
18. Contingency Spending 350,000
Total $ 8,365,000
Community General Hospital will set the requisite money for
replacement of equipments by the following methods:
1. Depreciation on previous equipments is a reserve for future
equipment replacement.
2. Creating Asset Specific reserve to be bought later.
3. Raising more finance by debt or equity for buying
equipments.
In relation to replacement of existing equipment, capital budgeting
requires that,
the NPV of selection buying new asset > NPV of the existing
equipment, what it means is that the new equipment will prove more
benefits than the existing equipment in the long run.
In case of purchase of new equipment, the benefits of buying new
asset should be more than the capital outflow.
The rate of discounting is the Weighted average cost of capital of
the hospital for computing the Net Asset Value.
Every asset should be purchased when the Benefits accrued from the
purchase of equipments are more than the capital outflow of
$4550,000
Community General Hospital Community General Hospital has enjoyed a history of success in attracting and...
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