HA 620 Unit 6 capital request proposal example

A Second CT Scanner for the Emergency Department: A Capital Request With Acquisition Cost Built Up, Incremental Cash Flows Only, and a Seven-Year Net Present Value

Student Name

Health Care Administration, Herzing University

HA 620: Healthcare Economics, Finance, and Resource Management

Instructor Name

February 19, 2026

A Second CT Scanner for the Emergency Department: A Capital Request With Acquisition Cost Built Up, Incremental Cash Flows Only, and a Seven-Year Net Present Value

The Request

The imaging department of the composite 180-bed hospital requests $1,555,000 to acquire and install a second computed tomography (CT) scanner, a 64-slice unit, in the emergency department. The hospital's only CT scanner sits in the main imaging department, a four-minute transport from the emergency department, and runs near capacity on weekday afternoons. In the last fiscal year, 1,140 outpatient CT studies were referred to an outside imaging center because no slot was available within the referring physician's requested time, and emergency patients waited a median of 58 minutes from order to scan during peak hours. The request is for one asset, with a decision needed at the April capital committee.

Total Acquisition Cost, Built Up

The cost is built from its parts rather than quoted as a single figure.

Incremental Cash Flows

Only cash flows that exist because of the new scanner are counted. Scans the existing scanner already performs are excluded, because their revenue and costs occur with or without the request.

Incremental volume: 3,200 scans a year at full operation, made up of about 1,100 outpatient scans now referred out that would be kept, and about 2,100 emergency scans moved from the main scanner, which frees main-scanner time for scheduled outpatients who now wait. The emergency scans themselves are not new revenue; the new revenue comes from the outpatient scans that return, and from additional outpatient scans the freed main-scanner capacity can absorb, estimated together at 3,200 billable scans a year. Year 1 assumes 75% of full volume, or 2,400 scans, while referral patterns change.

Net revenue per incremental scan: $260 technical component, weighted by the outpatient payer mix. Variable cost per scan: $45 for contrast and supplies. Contribution per scan: $215. This uses direct variable costs only; a full-cost view that assigned a share of imaging overhead to each scan would show a smaller margin, which is why accurate cost measurement matters for decisions like this one (Kaplan & Porter, 2011).

Added fixed costs: one technologist to staff evening hours, $85,000 a year with benefits; a service contract from Year 2, $110,000 a year.

Net cash flow: Year 1, 2,400 × $215 − $85,000 = $431,000. Years 2 to 7, 3,200 × $215 − $85,000 − $110,000 = $493,000. No salvage value is assumed at the end of Year 7, the expected useful life for this equipment in a high-use setting. As a tax-exempt organization, the hospital has no tax effects to include.

Discounted Result

The hospital's board-approved discount rate for capital projects is 7%.

Reading the Result

The net present value is about $1.04 million, and the internal rate of return is about 23.8%, well above the 7% hurdle rate. Simple payback falls in the fourth year: cumulative cash flows reach $1,417,000 by the end of Year 3, and the remaining $138,000 is recovered about three months into Year 4, a payback of about 3.3 years.

Two sensitivity tests were run on the least certain inputs. If volume were 20% lower than projected in every year, the net present value would fall to about $335,000, still positive. If revenue per scan were 15% lower, at $221, because more returning patients had Medicaid or high-deductible plans, the net present value would be about $401,000, also positive. Both tests change the size of the return but not the decision. The combination of both would bring the project close to zero, and that is the scenario the department will monitor in its first year.

Two benefits are real but excluded from the cash flows because they cannot be measured reliably: shorter emergency department stays from faster imaging, which reduce boarding and diversion, and the clinical value of faster diagnosis for time-sensitive conditions such as stroke. The capital budgeting method follows the course finance text (Pink & Song, 2020). Because the committee must weigh this request against others competing for the same capital, the next unit ranks it using explicit criteria, as priority-setting practice recommends (Mitton & Donaldson, 2004).

Alternatives Considered

Three alternatives were examined before this request was written. Extending the existing scanner's hours into the evening would add capacity at the cost of one technologist, about $85,000 a year, with no capital outlay. It would recover some outpatient scans but would not shorten emergency waits in the afternoon peak, when the scanner is already full, and it concentrates all CT risk on one machine, so any breakdown would stop CT for the whole hospital. Leasing a scanner instead of buying one was quoted at about $28,000 a month for seven years with service included; at 7%, the lease payments have a present cost of about $1.86 million, and with the same room construction and training added, the lease path costs about $2.26 million against about $2.05 million for purchase plus the service contract, and the lease adds little flexibility because the room construction is needed either way. Continuing to refer outpatients to the outside center has no cost to the hospital but loses the revenue on 1,100 scans a year and leaves patients traveling. Purchase was preferred because it meets both needs, emergency speed and outpatient capacity, and because it provides backup for the existing scanner. The redundancy benefit is not valued in the cash flows, but it is a real reduction in operational risk for a hospital with one CT scanner today.

Recommendation

Approve the $1,555,000 request, with monthly reporting in Year 1 of incremental scans and revenue per scan against the projections, and a formal review at month 12. If incremental volume is below 2,000 scans at month 12, the department will present a plan to extend outpatient access hours or reconsider the referral agreements. The hospital and figures are composite.

References

Kaplan, R. S., & Porter, M. E. (2011). How to solve the cost crisis in health care. Harvard Business Review, 89(9), 46-52.

Mitton, C., & Donaldson, C. (2004). Health care priority setting: Principles, practice and challenges. Cost Effectiveness and Resource Allocation, 2, Article 3. https://doi.org/10.1186/1478-7547-2-3

Pink, G. H., & Song, P. H. (2020). Gapenski's fundamentals of healthcare finance (3rd ed.). Health Administration Press.