PROJECT CLASSIFICATIONS

Although benefits can be gained from the careful analysis of capital investment proposals,

such efforts can be costly$.$ Certain projects may warrant a relatively detailed analysis, along

with senior management involvement; for others, simpler procedures should be used. Accordingly, large health services organizations generally classify projects into categories, and by

cost in each category, and then analyze each project on the basis of its category and cost.

For example, Bayside Memorial Hospital uses the following classifications:

$$ Category $1$: Mandatory replacement. Category $1$ consists of expenditures related

to replacing worn$-$out or damaged equipment necessary to the operations of

the hospital. In general, these expenditures are mandatory, so organizations

usually make decisions relating to them with limited analysis.

$$ Category $2$: Discretionary replacement. This category contains expenditures

to replace serviceable but technologically obsolete equipment. The purpose

of undertaking these projects is to lower costs or to provide more clinically

effective services. Because category $2$ projects are not mandatory, a detailed

decision process is generally required to support these expenditures.

$$ Category $3$: Expansion of existing services or markets. Expenditures to increase

capacity, or to expand in markets currently served by the hospital, are

included here. These decisions are more complex, so a detailed analysis is

required, and the final decision is made at a high level in the organization.

$1.$ According to the above, what are the first three categories of project classification $($Categories $1-3)?$ Which of these categories requires the most rigorous analysis?

$2.$ What are some of the advantages and disadvantages of breakeven analysis? What important information is typically left out of a breakeven analysis?