Week 5: Cost-Benefit Analysis

Consider your PICO(T) and the proposal for your final project. When you think of it as a type of new program development, what specific information will you need to obtain to create the cost-benefit analysis as part of your business plan for the project?

Week 5: Introduction

Table of Contents

Welcome to Week 5

A second major type of budget, capital, is the focus of this week. The capital budget addresses the more long-term elements of the strategic plan. In addition to learning the different components of the capital budget, you will apply them to the process of creating, monitoring, and evaluating it.



Apply evidence based financial knowledge and skills within the context of holistic care principles and caring health environments. (PO 1, 2, 5) {AACN Essentials: II,III, V, VIII} {ANCC-NE-DOP: I,III}

Weekly Objectives

  • Using a given budget scenario, perform a simple cost-benefit analysis for return on investment (ROI) for a capital investment. ((CO 2,3) (ANCC-NE-DOP I.B. 4
  • Apply the principles of cost-benefit and break-even analyses to a proposed new project or program development. (CO 2,3) (ANCC-NE-DOP I.B.4.; I.B.5; II.C.6)


Articulate the relationship between managerial and financial decision making and its implication within a culturally diverse healthcare organization and patient population. (PO 1,3) {AACN Essentials: I,II} {ANCC-NE-DOP: I, II, III}

Weekly Objectives

  • Using a given budget scenario, perform a simple cost-benefit analysis for return on investment (ROI) for a capital investment. ((CO 2,3) (ANCC-NE-DOP I.B. 4
  • Apply the principles of cost-benefit and break-even analyses to a proposed new project or program development. (CO 2,3) (ANCC-NE-DOP I.B.4.; I.B.5; II.C.6)

Week 5: Reading

Required Readings

Leger, J. M., & Dunham-Taylor, J. (2018). Financial management for nurse managers: Merging the heart with the dollar (4th ed.). Burlington, MA: Jones & Bartlett.

  • Chapter 3: Microeconomics in the Hospital Firm: Competition, Regulation, the Profit Motive, and Patient Care
    • The Business Case: Electronic Health Record Systems in Hospitals
  • Chapter 5: Budgeting
    • Break Even Analysis
  • Chapter 11: Accounting for Healthcare Entities

Rundio, A. (2016). The nurse manager’s guide to budgeting and finance (2nd ed.). Indianapolis, IN: Sigma Theta Tau International.

  • Chapter 6: Capital Budgets


Olivares, E. (2014, May 19). ROI calculation – Made easy [Video file]. Retrieved from https://youtu.be/oyZ6DKAK_QI

Week 5: Lesson

Table of Contents

Capital Budgets


This week, we turn our attention to an important component in the strategic plan, the capital budget. Although operational budgets are considered day-to-day type of budgets, the capital budget addresses elements of the strategic plan that are more long term. What they are, the process for developing them, and how they are evaluated and controlled are important aspects that you’ll learn in this lesson.

Welcome to week 5. We are making headway into the class. Last week, we focused extensively on the expense budget. In this lesson, we will focus our attention on capital budgets. What they are, the process for making a capital budget, a break-even analysis and return on investment. A capital budget is a plan for acquisition of long term investments.

These investments can range from items as small as new intravenous infusion pumps, to projects as large as completely rebuilding a hospital at a new location. The key element in capital budgeting is that the building or piece of equipment being acquired has a lifetime that extends beyond the year of purchase.

This lifetime is determined by each organization. At my organization, the item has to have a life expectancy of three or more years. Capital budget items are often referred to as capital assets, long term investments, capital acquisitions. The money used to purchase long term investments is often referred to as capital.

This assets are treated separately from the operating budget expenses because of their multiyear nature. They are only partly used up in any one year. And in anyone here, the organization only earns part of the revenues that the capital assets generate over their useful lifetimes. If this assets were included in the operating budget, their entire acquisition cost would be compare with revenues only in the year the asset was purchased.

Most capital assets that are good financial investments over their entire useful lifetime would appear to lose money, when only one year’s worth of revenue is considered. By having a separate capital budget, multiyear assets can be evaluated on the basis of their implications for the organisation over their entire useful lifetime.

Capital assets are generally purchased to replace older items of a similar nature, to improve productivity, substituting equipment for more expensive labor. To improve quality of care, often the addition of new technology or facility upgrades. Or to provide needed equipment for a new service or expansion of an existing service.

A variety of other reasons to acquire capital assets will also arise from time to time. Such as the need [SOUND] for equipment that will improve employee or patient’s safety. Capital assets are often quite expensive. However, high cost is not a required element. The only requirement is that the capital asset must be able to provide useful service beyond the year it is first putted to use.

For pragmatic purposes, most organizations set a minimum dollar that meant for inclusion in the capital budget. It is not worth the extra effort analyze and track relatively inexpensive items over a period of years. Items that have a low cost are treated as part of the operating budget even if they have a multiyear life.

Most healthcare organizations have a minimum costs requirement of anywhere from 1,000 to 5,000 for an item to be included in the capital budget. So, what does it take for an item to be classified as the capital purchase at your organization? Can you think of some capital purchase items that your organization is purchase in the past year?

How does a nurse leader go about requesting a capital purchase item? This do happens in the budgeting cycle and is a process that requires thought and strategy. What prompt the thoughts surrounding a capital purchase? Often the starting point is the identification of a new need. Perhaps you are the nurse manager at a home health agency and the company cars your nurses are currently driving are having some issues.

This would be the starting point of a capital request. Or maybe you’re the nurse leader in a hospital’s ICU and you have identified a particular piece of equipment to improve the efficiency of care delivery. Or hear the nurse leader in the operating room, who has a surgeon, who has requested a particular piece of equipment because the technology surrounding this equipment leads to better patient outcomes.

Each of these are the starting points of the capital process. Once you have identified the need, the next step in the process is to do trials get quotes. Figure out how much the item costs. Then you need to think about are there any disposable items that the product will need.

Is it a patient chargeable item? Will the item involve the need for additional FTEs? All of these questions, and much more, must be thought of by the nurse leader. So how do you start? The process generally starts with an idea. Put a filler out there to the stakeholders on your unit.

Ask them what equipment needs updating, replacing or what you need to implement. Then speak with the vendors and bring them products for trial. Involvement of the stakeholders in selection of a new piece of equipment is essential. Having a formalized trial with evaluations allows for staff, physicians and users of the equipment to give their open honest opinion of the different products.

While the trials are going on, request quotes of the item, so that you can utilize a cost comparison. Make sure you know what other departments in your organization will need to be involved. For example, biomedical engineering, information technology, often they are affected by new purchases within health care organizations.

Inform these departments that you’ll be purchasing new equipment and invite them to come be hands on. Additionally, understanding if this equipment is patient chargeable and if so, what types of revenue might be expected? Once the trials are completed take the time to review the evaluations. Use the results of the evaluations, the cost of the equipment and any revenue that you might earn to assist you in deciding which product is best for you to purchase.

Now, you as the nurse leader need to put together your justification. This is where you need to look at the return on investment as well as the break even point for out lay of money. So what does all of these mean? Sit back and think about your own personal finances.

Do you go out and buy a new car without considering many components? Do you look at ratings for safety, satisfaction, and recalls? Do you test drive several different cars that you have comparison. Do you have a final number in your head about how much you’re willing to spend? As leaders, we owe the organizations we work for the same considerations when spending their money, as we do when spending our own money.

We need to explain the cost of the item, why it was needed, and who will be effected by the change. What are the consequences if you don’t buy the item? What patients will benefit most and how long will it take for the cost and the revenue to offset each other?

Here, we see the beginnings of the capital worksheet. Each organization may request information that is a little bit different, but the overall premise will be the same. So which department are you looking to buy something for? Here, it’s the OB/GYN Clinic and it’s cost center 6020. So what is it they’re looking to buy?

A 4D ultrasound machine. So who’s the manufacturer? GE, and they would like the Voluson S10, how much does this unit cost? $100,000, but they want 2. And what’s the total approximate cost for 2? $200,000, and then they write the justification. So this justification goes into the why this OB Clinic is considering buying these ultrasound machines?

So why would they like the equipment? So January of 2019, will they need additional FTEs? Yes, they’ll need 1.7 ultrasound techs at a salary of $113,900. Will they need additional supplies? Yes, they will need multiple probes. Is additional training of personnel required? No, so then you look at where the revenues might be.

Is this a new procedure for the clinic? It is, and what CPT codes might be billed? So you need to have that information. Is this patient chargable? It is, how many procedures do you expect annually? What are you going to charge per procedure, and what is your projected annual total revenue?

And what auxiliary equipment might be needed? So you’re gonna need something to clean the probes that you use on the patients. Once you have basically filled in the information, it is important to understand if this piece of equipment is purchased when the organization can expect to break even. So you need to conduct a break even analysis.

This is a part of the proposal for capital equipment. Administrators will want to know how, what it’s going to cost including ancillary costs, and when they can expect a return on investment. So let’s look at this machine. If two machines are $200,000 and the cost of the FTEs are 113,900, then the total investment costs are $313,900.

So how long will it take to break even? So, we said that they would be charging $300 per procedure cash upfront, cuz insurance doesn’t pay for a 4D ultrasound. So you divide the 313,900 by 300 and that comes to 1,046 ultrasounds have been completed, the equipment will have pais for itself.

So what’s the time to break-even? That equals the average number of services per month. So if they expect to do a 100 ultrasounds per month and the break-even point is 1046 ultrasounds, it will take 10.5 months to break-even on the investment. That sounds like a pretty good deal to me.

So next when they expect to get a return on their investment? So this begins with the first service after break even point is achieved. So 10.5 months after the service begins. They recoup and revenue production. Year 1, there’s 1.5 months left in the year at $300 and 150 ultrasounds, that’s an additional revenue of 45,149 for year 1.

Year 2, it’s pretty much all cash for them and increased revenues, so that’s $360,000. Can you think of a product in your organization that a break-even analysis or return on investment analysis might be helpful? So I hope you learned something this week about capital equipment and how we go about setting the stage to purchase these items.

Have a great week, and I’ll see you in week six.


Capital budgets consider the long-term investments of the organization. They are an important part of the strategic plan for the institution’s stability and growth. As a nurse manager or nurse executive, it is necessary for you to know how capital budgets are developed, for what, and how requests for capital items are made. In particular, knowing how to determine whether a capital request will have a negative or positive impact on the overall budget is key to being successful in getting approval for the request. You have the opportunity to apply some of these principles in the assignment and discussions for this week.

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