Introduction
Every organization has its set goals and objectives to which all the efforts are directed towards achieving. The set goals are the targets that all employees will work to meet. Various ways can be adopted by an organization to ensure that there is an increase in its returns. These include starting capital projects in an organization aimed at improving the performance of the employees increasing production. An organization can take on capital projects which will require large capital but bring more returns to the organization. A capital project is a long-term investment that requires a large amount of money to acquire, develop and run or maintain (Finance Scholar, 2008).
Our organization’s capital project
The organization I work for is a private learning institution that admits students from all parts of the country. This is a profit-making enterprise whose main objective is to ensure good returns for the owners of the institution. The college incurs many expenses in the process of delivering its services which therefore needs an extra source of funds to meet the expenses. The organization has started to build a number of buildings that will be used as hostels to house the students. This project is aimed at cutting the costs of transporting the students to their respective destinations and also attracting more others into the institution. This project however calls for a lot of funds since the institution had to purchase land for expansion of space to accommodate the buildings.
The institution will also be forced to forego some of its financial commitments to meet the budget of installing the building. This is a long-term plan that will have a lot of benefits to the institution (Kramer, & Ellertsen, 2008). The plan will attract more students to the institution leading to its expansion and increased profitability. The hostels will also cut the costs that the institution has been incurring in taking the students home. These are costs due to fuel and maintenance of the vehicles. The success of this project will also ensure the stability of the college since the chances of financial drawbacks will be reduced. The hostel is meant to have fifty rooms where each room will be holding three students. This will have a capacity of one hundred and fifty students.
Break-even analysis
The projected financial costs are as follows:
- The fixed cost of building 50 roomed hostel is $30,000.
- Your variable costs are $5000.00 materials, $2000.00 labor, and $1000.0 overhead, for a total of $8000.00.
The charges for each student will be $15.00 per year. This will be a total of $45 per year per room. The total amount per year for the whole hostel will be $2250 per year. Then, $8000 divided by $2250 is 3.5 (Healthcare Financial Management, 2009).
This is the break-even analysis for the project (Kleinmuntz, and Kleinmuntz, 1999). This means that the hostel will have to be functional for three and a half years for it to start making a profit for the institution. This will be a very profitable project which will start making returns in only three and a half years. It means that by that time, all the loans that were taken during the building of the hostel will be fully repaid. The rest of the years will be having the obvious expenses of paying for water, electricity and other maintenances.
Conclusion
A capital project in an organization is therefore very important regardless of the expenses and the financial input required. However, the benefits are felt later when the project starts bringing in returns to the organization. The tasks involved in setting up the projects are also heavy and therefore it calls for commitment from all members of the organization (Miller, & Ryan, 1995).
References
Finance Scholar (2008) Example and explanation of payback rule in recovering initial investment costs. Web.
Healthcare Financial Management (2009). 50 (6), 70-75. Payback period Analysis. Web.
Kleinmuntz, C. E. & Kleinmuntz, D. N. (1999). A strategic approach allocating capital in healthcare organizations. Healthcare Financial Management, 53 (4), 52-57. Web.
Kramer, A. K. & Ellertsen, R. J. (2008). Using PCs for effective case-mix based budgeting. Healthcare Financial Management, 47 (6), 52-55. Web.
Miller, T. R. and Ryan, J. B. (1995). Analyzing cost variance in capitated contracts. Healthcare Financial Management, 49 (2), 22-23. Web.