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Summary Case 3
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Summary of 8 pages for the course HPI4007 Financial Management of Healthcare Organisations at UM (Case 3)
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Case 3 Renovaton or contractnn out?Learning goals:
1. What are capital investment strategies?
2. What is an investment analysis? And how to perform it?
3. What is a tmeevalue analysis? And how to perform it?
4. How to select the appropriate strategy?
5. Phrase the brainstorm keywords in your own words
6. Applicaton to this case (3)
7. Case 2 – take another look at the applicaton to case 2 to come up with advice
- Start with Finkler & Gruen
- Skip 201e207 from Finkler
- Reiter – Hardy – Coye are seen as illustraton
1. What are capital investment strategies?
Lecture
Capital investment represents:
Major monetary investments
Expected to achieve longeterm benefts
Undertaken with the aim to assure the fnancial survival of an organizaton
Not only tangible, e.g. new informaton systems
Types
Material investments; example: purchase of a medical equipment, introducton of a
management informaton system etc.
Financial investments; purchase of shares, bonds etc. NOT considered in this unit
Functon of capital investments:
e Achieving fnancial objectves: improved access, quality
e Atractng new fnancial resources: an organizaton only gets investments if their positon is
advantageous. So for example from investors or the state.
e Achieving organizaton objectves: recovery, proft size
, Finkler
Capital budgetng: process of planning for the purchase of capital assets (middelen, actvia)
Capital assets: assets with lifetmes of more than one year
Why do capital assets warrant special atenton?
o The inital cost is large, so therefore amortzaton and depreciaton:
Amortzaton (=afschrijvingen): the process of spreading out the capital asset
over the years the asses is used. The value stays the same. It’s a cost,
although is does not entail cash outlow
Depreciaton (waardevermindering): amortzaton of costs of physical assets
(so buildings and equipment, and not capital assets which are any resources
that will beneft the organizaton). The value declines over the years.
o The items are generally kept a long tme
o We can only understand the fnancial impact if we evaluate the entre lifetme of the
asset
o Since we ofen pay for the asset early and receive payments as we use it later, the
tme value of money must be considered
Lecture
Strategies of capital investment: these strategies are part of one of the steps of the investment
analysis.
Methods based on statc evaluaton criteria
o The payback method; determine the payback period of an investment. How long it
will take to repay the inital investment.
Focus on getng the investment back as soon as possible: a short payback
tme means that the investment is payed faster. So, it assumes the shorter
the payback period the beter the project.
Establishes how long it will take to repay the inital investment.
Start from the inital investment, then add the net cash fow for each year,
untl you reach a year with a positve result.
An indicaton for in one investment is more atractve than another
It’s up to the manager to make a decision
This method is used where the early return of funds is of prime importance –
for example, where an organizaton has liquidity problems or has the capital
funds earmarked for another project within two or three years’ tme.
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