1-2-3-Week 3-Dis.-PEER RESPONSE

PEER RESPONSE 1: Cindy Curry

Capital budgeting requires a great deal of attention to details that one might overlook.  I am particularly thinking of an acquisition that a company made based on numbers that looked as if it was a great investment. Since most of my experience has been in health care, I'm going to talk about a health care organization again. The great push in recent years to eliminate over spending in health care have led to accountable care organizations and value based purchasing.  Because of these changes, many companies are expanding their current services to other divisions or types of health care.  For instance, an organization that is primarily of skilled nursing and long term care facilities for after hospital care, decides to acquire a hospice agency.  Because patients also go from a facility or hospital to home without the need for hospice, the agency also acquires a home health agency as well as a private duty agency.  From the standpoint of strategy, this plan seems to have covered all after hospital care.   The though is, that if all after care is controlled by the same company, hospital readmission rates can be controlled and thus the skilled facilities will grow by the grace of the hospital referrals because they are controlling these readmission rates.  In addition, the hospice needs a feeder source to grow in a saturated market.  The skilled facilities will feed both the home health and the hospice and the home health will feed the hospice.   So, now the capital budgeting comes into play.  A few minor details were overlooked, or perhaps not known to the out of state corporation.  The home health agency that was to feed the hospice had a census of 400 patients.  The problem is, there was no account taken into consideration that 75% of those patients were pediatric.  When past evidence shows that only 10% of home health or skilled patients are hospice appropriate, imagine the deflated hopes of those who overlooked the fact that only 100 patient were geriatric of the home health agency.  10% = 10 patients.  Then looking at the skilled facilities, 10 of them serving only 500 patients.  10%= 50, however those are spread over 6 six counties. Not an efficient method for a hospice.   Going back to the home health agency, greater than 2/3 of the pediatric patients, were Medicaid rather than private insurance.  Most were break even or loss of revenue.   To increase the census of the 10 skilled facilities and get them full, the capital budgeting decision was made to renovate the buildings to be more appealing to the communities that they served.  In addition to the added cost, these buildings were in smaller communities.  Close knit, family oriented, local minded communities.  This was a crucial fact that had been overlooked when capital budgeting was at play in the plans for expansion.  These communities did not like the fact that an out of state company was going to benefit from their hard earned local money.   As you can imagine, there is great struggle and a few things for sale to try to recoup any monies previously spent. Capital budgeting can drastically change based on events that are unknown or out of the direct control of the organization.  A combination of both qualitative and quantitative factors should be considered as one can directly affect the other. One qualitative decision that should be looked at is how the organization fits the particular market and recognize that all states are not the same.  Quantitatively, how much money will be lost in the initial stages of an acquisition.  Employees are often very resistant to change especially when through an acquisition.  The great deal of the low cost buy, may cost a great deal more than expected in dollars and reputation.

PEER RESPONSE 2: Paulette Tucker

Capital Budgeting

Since capital budgeting is a tool for maximizing a company’s future profits, and since most companies are able to manage only a limited number of large projects at any one given time. Managers should consider a capital budgeting consideration with a quantitive factor.  Since quantitive factors are measured in numerical terms they could choose the percentage growth in demand for the product to be manufactured in a future factory, repairing a roof to a building, to purchase a piece of equipment (www.investopedia.com).  This can help companies to maintain or increase the scope of their operations; since companies are looking for ways to acquire or upgrade physical assets using the percentage growth in demand would make good sense.  

 For a qualitative factor managers could consider judgment because it seems to play an important role do to the responses of companies.   Vision of judgment, market potential, the possibility of technology change, trend of government policies, and judgmental play are importance role.  Also, judgment and intuition should definitely be used when a decision of choice has to be made between two or more, closely beneficial projects, or when it involves changing the long-term strategy of the company (http://professional-edu.blogspot.com).  Although the payback period, (NPV) net present value and internal rate of return are used because payback period ignores the timing of cash flows.  The net present value method could have a higher net present value and (IRR) internal rate of return is the breakeven interest rate it can be tricky when calculating.  I believe the percentage growth in demand and judgment would be good for capital budgeting.

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