#1 I agree that capital budgeting is useful and understanding how it works definitely helps to examine different financial options. While it has only been recently that I've been in situations that required capital budgeting, I've enjoyed the processes and evaluating the different possible options. I'll focus my discussion on two topics, one personal and one work related.
My personal example is when I bought my house. It was a significant amount of money in my life and consumed most of my thoughts for six months. Between saving cash and looking at different places, there was a lot going on. I had to determine how much down payment I wanted tied up in the property and whether I would have a better option if I went with a different house. After meeting my wife and discovering that she also had a house, I went through another round of capital budgeting decisions. Since I already had the property, I weighed the benefits of selling the property or renting it out. I followed a couple of onlines guides about rental properties, including how much percent rent I needed to charge to justify the opportunity costs of selling the property, the increased costs of maintenance from tenants, and the tax benefits from owning property and your own business. Since I didn't have a lot of other financial choices demanding cash at that time and the numbers came out similar to the suggestions for the rent price I was able to obtain, I decided to rent for several years. I enjoyed these decisions so much that I looked for additional opportunities to use them. I decided to obtain my MBA, which caused an increase in my demand for cash for tuition. It also decreased my time available to properly take care of the property, so I ended up selling the house.
For my work example, I am part of a large pilot program for my company to test out a new planting system for our agricultural research plots. Here is a link to the manufacturer's website (Links to an external site.) if interested. My manager was tasked with implementing the necessary changes to switch business practices from our previous way of planting to the new equipment. I was tasked with coming up with significant parts of the plans and to record benchmarks so that it can be determined if the project is continued or abandoned. The project was going smoothly, but the coronavirus has caused a significant business model disruption. Regardless, I'm excited to see how the metrics we are generating compare to the previous model and discussing possible improvements to the project once planting is finished.
While I wish I would've taken a class like this before making those decisions, I did end up using equations similar to IRR and payback periods for my house examples. Due to my work example, I can appreciate all of the time needed to develop the proper estimates for calculating NPV. Learning about these topics has made it easier to compare financial options that I have and hopefully pick the ones that benefit me the most.
#2 A few years ago, the healthcare organization I work began to evaluate the building of a new clinic in a specific region of the county. Our business development team completed evaluations to determine there was a need for services to this segment of the community. Next the financial department worked with the business development team to develop the pro forma. This process was a great example of capital budgeting to help determine weather to proceed with this project. As an operations manager, I worked with the team to help determine initial expenses or investments as well as operational expenses to operate the clinic. Our discussions included starting with one or two initial primary care physicians then adding specialist in the next 3-4 years. While I was not involved with putting together or evaluating the specific data of NPV or IRR, I was aware that delaying these additional expenses, while building the business, helped generate the income to reinvest in additional services in the future. We were expected to
eak ground this spring. However, with the events of COVID 19, our project will most likely be delayed. While reading the article by Grahm, the study discussed tax advantages was most important for large organizations when making the decision to issue debt. I was thinking this would not pertain to our organization due to its not for profit status. However, I am aware that credit rating and financial flexibility are important aspects in determining debt for the project to build a new clinic. The COVID response of our organization and its use of debt is an example on how it’s been able to manage business due to clinic closures and declining patients. As this pandemic continues, we will have to make other crucial evaluations and decisions to ensure the future of our business.
While searching for an article on the build of a clinic and capital budgeting, I came across this article on decision making when purchasing new medical equipment. The article discusses NPV, IRR, and
eak-even analysis. The article is a great example of the use of capital budgeting to evaluate two equipment options that the clinic was considering.
Capital budgeting table from the article of one of the equipment options being considered: see attachment.
Kim D. S. MD Edge. “How to Decide on Purchasing New Medical Equipment” 2018MAY30. Retrieved from: https:
www.mdedge.com/obgyn/article/164255/practice-management/how-decide-purchasing-new-medical-equipment
#3 In the past, my wife and I have discussed purchasing a rental property or purchasing a vacation home in northern Wisconsin that we could rent out when we were not using the house. The plan never made it past the discussion phase of the pros and cons. If we had more information about the income and expenses that a property in northern Wisconsin would incur, then we would be able to utilize the payback period method. This would allow us to see how long it would take to
eak even with our initial investment. If we are willing to hold onto the property for that amount of time, then it may be financially beneficial for us to purchase the property.
Due to the recent pandemic corporations have been forced to change how they work. In fact, this article by Chicago Tribune (Links to an external site.) discusses how job analysts expect remote work to increase after the coronavirus pandemic is over. More employees are now working remote, which means that companies need to have the right tools available for their employees. One of those tools discussed in the Chicago Tribune article is a video conferencing service. It is important for people to stay connected, and one of the best ways to do that is through video conferencing, so employees can have that social interaction.
Verizon is one of the companies that is seeking to capitalize on a business opportunity during this crisis and agreed to acquire the video conferencing service BlueJeans. The Business Insider article (Links to an external site.) describes how CEOs believe that the shift to more remote workers will continue into the future. Verizon is one of the companies that would be able to bundle this into their cu
ent services portfolio to compete with the other video conferencing providers. Verizon’s forward-thinking capital budgeting allowed them to acquire this company even during an economic downturn.