Capital Budgeting Process

Topics: Finance, Net present value, Bond Pages: 5 (1326 words) Published: May 4, 2012
Capital Budgeting Process

Health Service Finance

The purpose of this paper is to discuss how organizations issue bonds, the primary reason for leasing and short-term, long-term borrowing. We will also discuss the primary source of equity financing for not-for-profit healthcare organizations, capital budgeting as well as the discounted cash flow methods.

Organizations that decide to issue bonds generally go through a series of steps; their function is to assess the relative risk associated with a given bond. A bond is loan to a company or government, with a person the bondholder, as the lender. Organizations issue bonds when they want raise funds, generally you receive the principal called the par value, at maturity of the bond and interest periodically, depending on the market. The specific parties involved in financing a bond are: Issuing Authority

Investment Bankers
Healthcare Facility
Trustee Bank
Legal Counsel
Bond Rating Agency

This issuing authority is only involved in tax exempt financing, in most cases the issuing authority is some state or local government authority. Investment bankers have dual roles, they serve as advisors to the healthcare facility that is issuing the bonds; they serve for the focal point for coordinating the services of the feasibility consultant, legal counsel, and the bond rating agencies. Their advice can be extremely important to receiving timely funding under favorable conditions. Investment bankers serve as makers between the market and the issuer of the bond.

Leasing is under taken primarily for major movable equipment and does not go through the normal review and approval system. Lease payments should be considered as a capital expenditure. Contractual provisions of a lease should be kept in mind when determining the total expenditure amount, as well as future payments, length of term, or the alternative purchase price of the assets. Equipment depreciates, which affect your taxes, accounting procedures and various financial aspects of your company. The reason you should lease and how it will benefit your company are tax advantages, conserved capital, helps to stay within your budget, beats inflation as well as protect against obsolescence and preserves other credit

facilities. Leasing is one of the few remaining sources of fixed rate financing, there are clearly substantial economic attractions to leasing beyond tax benefits; is means to reducing business costs. Capital leasing is also an alternative to buying, this is a lease in which the lessor leases an asset for virtually all its economic life. In return, the lessee is committed to lease payments for the entire lease period. Financing is the other option; this includes getting a loan from a bank or other financial institution and paying it off over time with interest.

Short term borrowing may be used when a company experiences a short term need for funds during their operating cycle. Short term borrowing has different arrangements such as, single payment, line of credit, revolving credit arrangements, term loans and letter of credit. Usually, the portions of any loans due is to be repaid within a one year period. Long term financing is capital extended for a term longer than a year, long term financing is often in the form of a loan with a payback period, and it can include a 30 year mortgage or a 10 year treasury note. Equity is another form of long term financing, such as when a company issues stock to raise capital for a

new project. Some purpose of long term finance is to finance the permanent part of working capital, expansion of companies, increasing facilities, construction projects on a big scale, provide capital for funding the operations; this helps in adjusting the cash flow. Factors determining long term financial requirements are the nature of the business, nature of goods produced and technology used. The...

Active capital management strategy/
William O. Cleverly, P.H. (2011) Essentials of Healthcare Finance 7th Edition. Sudberry Jones & Barlett Publishers. –dictionary.freedictionary. com
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