Capital Project: Capital Purchases to the Firm

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Introduction

Capital purchases to the firm are those expenditures whose benefits will be experienced or produced for a long period of time. These capital projects can be tangible or intangible assets. Normally when the management is deciding to invest, their major aim is to improve efficiency and profitability at the same time to reduce cost. In this case the capital item is for a private hospital whose prevailing market conditions are the same as for the perfect market. The investment opportunity is to purchase software for filing patient records. The hospital has been experiencing long queues in the past and even patients records were hardly found (Brealey, Myers and Marcus, 2007).

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Benefits of the project to management

Under escalating costs of maintenance of information technology services in the company, one of the biggest challenges is to taking effective measures for effective management of information technology in the company along with establishing a proper co-ordination between information technology services and the ongoing business activities. To attain a cost-effective information technology the following goals are required to be accomplished.

The first thing that is required to be done for effective management of IT services is to establish a special office of technology in the head quarter of the hospital under the supervision of COI for the purpose of the implementation of strategic planning to manage IT services to the businesses of the firm in cost-effective way.

A complete evaluation of every service that the department of information technology provides to the entire businesses of the company has to be done. The evaluation is necessary to find out to what extent each of the services contributes to the creation of value of the entire hospital.

Once evaluation of every service provided to the company’s business activities is done, all of the information technology services will be ranked according to the extent of their contribution to the value creation. The contribution of any particular service can be measured in terms of the amount of value added of the firm that can be attributed to that particular service.

Once all the IT services are ranked according to the contribution to the value addition, it is now necessary to measure the costs of maintaining those services.

After the evaluation of costs of every IT services, it will be now possible to conduct a cost-benefit analysis of each of the services. The Cost benefit analysis will be able to tell which services are cost effective and which ones are not so.

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It will be possible to rank each services according to the net benefit accrued to every service.

It will be not a wise decision to continue the business with those information technology services that have generated negative net benefits. To be put in other words, those services for which net costs of implementation and maintenance surpasses the amount of value created by the services to the firm’s activities, will be discontinued. On the other hand, the services which have been able to generate only marginal net benefits, will be restructured through the implementation of new hardware and software devices for the continuation of those services.

Today, a number of cost effective hardware and software devices have already been invented which are cost effective than the earlier versions. Implementation of these devices will be efficient enough to bring down the costs of conducting various information technology services on long run. Hence even if their immediate implementation seems to be a little more expensive, in long run they will be able to bring down maintenance costs significantly. Therefore to enhance cost efficiency of those services which are presently producing marginal net benefit due to high costs associated with them, new cost effective and more technologically advanced hardware and software will be bought.

For effective functioning of any business, it is very essential that there exists proper synchronization among all the parts of the business. The existent IT services should not be alien to the business strategies and business motives of the firm. If existence of any IT service is not justified by the type of business strategies of the firm, that IT service should be discontinued.

Hence, another major goal of the firm would be to discontinue all those IT services whose existence can not be justified by the given aims of the firm and the pattern of business strategies adopted by the firm. With discontinuation of those services, it would be possible to reduce total cost of the IT department as the maintenance costs of utilities, hardware and software devices and employees involved in those services is no longer required (Peirson, Brown, Easton, Howard and Pinder, 2009).

In a similar way, special focus should be placed on IT security services. Those security services will be discontinued which do not seem to be cost efficient. And marginally effective services will be restructured with the replacement of old hardware and soft ware with improved and cost effective ones.

Benefits to hospital

The hospital strategy is to invest in a proposal which is capable of utilizing the company s funds in an efficient and economical way. The purchase of software for filling patient’s records supports most of the management goals and some of the goals are:

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Increased hospital revenues

Proper filling of hospital records facilitates service delivery to the patients. Patients who will visit the hospital in a day will be quickly attended to encouraging many to visit the hospital. This will increase the amount of revenues received for the company. Further if the current patient will be influenced to visit the hospital again because of the better services he she has received, then the hospital revenues will increase.

Cost reduction

The introduction of the new software will enable the management to reduce the number of workers who worked manually in the filling department hence reducing labour cost. Also the cost of buying files and papers for filling will be done away with. Further the space used to contain files will be utilized for other productive activities in the hospital.

Better and improved services

The patients who will visit the hospital will be served quickly because the system will be faster. The records for regular patients will be obtained easily for doctors’ recommendations and this will enhance proper treatment. The software will efficiently allocate to each department the records it requires within a very short period reducing the amount of time spent allocating the manually (Helfert, 2001).

Quality assurance

The purchase of this software will guarantee reliability and convenience. Patients who visited previously or had similar conditions will be assured proper medication because any doctor who attending them will determine which medication to prescribe basing on the existing records of the patient. The hospital is investigating whether it should go ahead in its acquisition of the filing software which as part of its improvement of the services to the patient.

The objective of hospital is to maximize shareholder wealth and in this regard the net present value is the best method to use. The net present value method is simple and straightforward method but when it comes to practical application of this method there may be some problems encountered. Therefore the following things should be kept in mind while using the net present value method (Ross, Westerfield, and Jaffe, 2010).

Conclusion

As for the categories of services and facilities, budget will reduce in all the division as some of the IT services will be abandoned given their negative net benefits. On the other hand, to increase cost effectiveness some new hardware and soft ware will be implemented in HQ as well as in all other division.

One thing required to be mentioned here is that full cost of installation of new software has not been incorporated in the budget of the first year. For the present budgeting, the total cost of new hardware or that of new software has been allocated over the period of five years following the method straight line depreciation. Under this method, the total value of investment on new equipments is equally distributed among the all the years. Here, it has been assumed that the new hardware or software will last for five years. Hence total value of investment has been equally distributed over the five years. Apart from this depreciation costs some additional costs have also to be included on account of maintenance of the exiting hardware and software.

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Reference List

Brealey, R., Myers, S. & Marcus, A. (2007). Fundamentals of corporate finance. Sydney: McGraw-hill.

Helfert, A. (2001). Financial analysis: tools and techniques: a guide for managers. New York : McGraw-Hill Professional.

Peirson, G., Brown, R., Easton, S., Howard, P. & Pinder, S. (2009). Business Finance. Sydney: Mc-Graw Hill.

Ross, S.A., Westerfield, R.W. & Jaffe, J. (2010). Corporate Finance. New Delhi: Mc-Graw-Hill.

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