There are three phases in the strategic planning of any organization. These are programming, budgeting, and controlling processes, which together make “a formal management control system” (Vraciu, 1979, p. 126). This paper aims to discuss how a medical organization may use the concepts of the “time value of money” and “useful life” to organize the purchase of new equipment and to calculate the depreciation expenses.
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It is highly likely that during the process of planning, the hospital will decide to purchase new equipment. In this case, during the process of budgeting, the Accounting Department will apply the concept of the time value of money. The concept of the time value of money implies that money acquired at an earlier date is more valuable than money gained at a later date because of its potential earning capacity. Thus, I assume that the hospital will try to purchase equipment as close as possible to the time of its first-time exploitation.
Besides, I am sure that in prospect, the Accounting Department will have to apply the principle of useful life. Hence, they will need to know that the useful life of any fixed asset, the medical equipment, in this case, is the estimated period during which the company will benefit from this asset. The managers of the company will also apply this knowledge when calculating the depreciation of equipment since changes in the useful life affect annual depreciation expenses. For example, if the estimated useful life of the equipment is one year, then the cost of its depreciation will fall entirely on this period. Consequently, if the useful life period lasts five years, the annual depreciation expense will be five times less.
Thus, I discussed the application of the concepts of the time value of money and useful life when purchasing new medical equipment. The application of these concepts is essential for organizational success. While planning the purchase of medical equipment, the concept of the time value of money will be used to determine the appropriate time for the purchase of the equipment. Wherein, the concept of useful life is usually taken into account because it has a direct impact on the annual depreciation expense.
Vraciu, R. A. (1979). Programming, budgeting, and control in health care organization: The state of the art. Health Services Research, 14(2), 126-149.