Health care Finance Discussion

HCS/385: Wk 4 Discussion Board

Risk factors in Capital Projects Decision

Capital projects are long-term investments that are capital intensive and serve to accumulate and improve the capital assets. In healthcare, capital projects entail installation of medical equipment, buildings, and capital-intensive medical devices. When evaluating the feasibility of capital projects, one must be able to predict their profitability. Capital budgeting is a crucial tool that is adopted to help estimate the profitability value. It does this by comparing their discounted cash flows to the risk factors (Dontigney, n.d.). These factors indicate the potential of a decision on regarding capital projects to cause a loss or undesirable results. They include market risks, project, project-specific risks, competition risks, and industry-specific risks.

Market risks cover an assortment of factors that are to be considered when making decisions on capital projects. Some of the market related risk factors include economic instability, inflation, and interest rates. The level of the experience of the investor in risk aversion influences their decisions in consideration of these factors. It is imperative to implement capital projects whose interest rates are predictable and are not affected by economic instability. Risk factors involving the particular project must also be considered. The project itself as well as the employees associated with it can increase the riskiness of the project. The project management may be unable to accurately envisage the project cash flows (Kengatharan, 2016). While the project may be viable, it may be unable to meet its schedule or it may present expensive requirements more than anticipated.

Competitive risks are the unanticipated activities that competitors present and pose a threat to the viability of the capital project. For instance, if a competitor develops a new procedure than reduce the production costs, it may destabilize all the speculations in regard to the capital project. On other hand, if the competitor quits business without a warning, it may suddenly increase demand on one’s business. If the capital project seeks to increase production by 70 percent but the demand increases by 150 percent, the organization would find it impossible to meet this demand. Despite the fact that these risks arise from the uncertainties of the competitors’ plans, regular assessment of the competitors would help generate a contingency plan for such risks. Abrupt changes in the regulations of an industry can also affect the feasibility of capital budgeting projects. Such changes affect costs of some crucial production processes and other associated with safety management (Dontigney, n.d.). It is imperative that the project management considers all these factors before making any decision regarding the capital budgeting project. Comprehensive analysis of all the risks involved ensures implementation of the most viable project.

References

Dontigney, E. (n.d.). What Factors Increase the Riskiness of a Capital Budgeting Project? Azcentral. Retrieved September 4, 2019 https://yourbusiness.azcentral.com/factors-increase-riskiness-capital-budgeting-project-26421.html

Kengatharan, L. (2016). Capital budgeting theory and practice: a review and agenda for future research. Applied Economics and Finance, 3(2), 15-38.