Question

The most obvious cost in a capital budget is the actual cost of the capital expenditure item. We must also consider other costs that will be incurred when we make the capital expenditure (purchase). These costs are important to include because they can be the difference between a successful implementation of the capital expenditure item and staying on budget. After reviewing the textbook readings, provide an example of a healthcare capital expenditure. Explain the rationale behind the purpose of a capital expenditure budget. In addition, include two other cost considerations and explain their inclusion in your capital budget plan. For example, if you are installing an Electronic Medical Records (EMR), you must include future cost for maintenance, software updates, new computers, etc. These are the hidden costs of operation often not considered in a capital budget.

Answer 1

Capital Expenditure (or CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment.

An example of a healthcare capital expenditure would be the purchase of a new MRI machine. The actual cost of an MRI machine is based on their imaging power which is measured in magnetic field strength units called Tesla. A low Tesla machine of power 0.2 to 0.3 cost around $150,000 - $500,000 and the strongest machines with 3 Tesla can cost not less than $1.2 million to $3.0 million.

MRI is a big machine and has to put in a specially designed room that constrain the magnetic field within the room. This room is known as MRI suite and costs around $2 million to $4 million. Apart from this two major costs some additional costs includes installation costs, computers and peripherals and patient support areas.

Maintenance cost of MRI machines is also very costly, MRI coils have to be cooled with liquid helium and needs to be replenished from time to time to make the magnets super conducting. A single replenishment cost may reach to $35000.

However various MRI manufacturers provides non maintenance machines with permanent magnets, i.e. helium is not required to replenished from time to time but such machines are comparatively expensive. Also the permanent magnets needs to be replaced after a useful life of about 5- 8 years. The replacement cost is high as much as $200,000 to $500,000.

However capital budgeting includes finding investments that are profitable but in healthcare industry, there comes multiple times that investments needs to be made without considering profitability e.g machines like MRI is a very important equipment.