Detailed Question:
Explain to the class how Capital Budgeting analysis is performed within your organization (or at a former employer). Discuss methods used for assessing the financial viability of proposed capital projects and the approval process. Also, respond to the remarks of two of your classmates on their topics as well.
Merely agreeing with someone's comments is not considered to be an acceptable post. A good posting should add to the value of the current discussion topic by adding information or insight into the original post.
at least 100 to 125 words in length.
Critic 1
work as part of the medical corps and we have the military medical system which is a large and dynamic multi-billion-dollar government outlay that is periphery to the Department of Defense's mission. The Medical Health Service basically handles the medical budget aspect of the overall defense budget and are utilized for capital investments such as building of new hospitals, clinics, other health facilities or renovating existing outdated facilities. The Budget outlay is coordinated with the three service surgeon generals and their assigned staff to equitably share what currently is approximately a $250 to $300 million dollar a year budget. When planning a capital investment in a Military Health Facility, it begins with a process of developing a Military Construction (MILCON) requirements list, analyzing those requirements to determine highest priorities, and presenting those priorities for inclusion in the President's budget. Military facility planning expertise is usually drawn from handpicked military officers with expertise in the following disciplines medical logistics officers, professional engineering or architecture education, healthcare administration education, nurse corps officers and medical equipment specialty Warrant Officers. The professional design teams and military staff schedule site visits, conduct face to face staff interviews concerning local processes and patient demographics, and develop collaborative solutions. The Sequential Military Capital Investment Planning Process chart is developed which shows a representation of the process to be discussed through most of the next three sections of the project, including Planning, Army Scoring and MHS Scoring. The end state of the entire process from MILCON requirements generation to the results of the Capital Investment Decision Model process is to generate a prioritized list of projects for inclusion in the President's Budget. Those projects selected for inclusion in the President's budget, are reviewed by Congress for approval in some form of legislation and returned to the President and signed into law.
Critic 2
When I have submitted requests for capital expenditure they have always consisted of the simple payback model. Typically the expected payback time is usually between 2-5 years (depending on the size of the investment). By achieving a return on investment in a short period of time, expenditures can generally be approved without much hassle and without complicating the calculation by determining the proper discount rate. The issue I have is getting solid numbers for savings estimates. Upper management is a stickler for real world applications not pie in the sky sales talk about time savings and quality improvement. We are generally required to run several trials for comparison and hedge toward the conservative results, it's always better to under promise and over deliver. Another issue that I did not see explicitly mentioned in the text was the fact that when calculating savings for time with full time employees total compensation should be used. For example in addition to a $15.00 per hour wage there must also be a provision for certain benefits provided such as health care, vacation, insurance etc. Someone making $15.00/hr may in fact be costing the company over $25.00/hr depending on the level of benefits provided in the total compensation package. Safety is another area that can be a cost savings for a company. For example a vacuum lift assist system we purchased included a price for safety by reducing the risk of back injuries. These are difficult estimates to make but it is similar to justifying an insurance policy. Once the proposal is written with a current method summary and a description of the improvement process including benefit and cost savings details, it is then submitted to upper management for review and approval. If all the information is presented in an easily understandable format and the savings calculations are justified the proposal is approved. If the payback is not realized quickly enough or the information is inadequate the proposal can be denied or returned for revision.