Nix It or ‘Phix’ It: It’s a Question of Value

James A. Anderson’s B-School article in the May 2002 24x7 explained how to use the Net Present Value (NPV) concept to justify new test equipment or tools. Taking this accounting tool one step further will help you to decide whether you should “phix” a piece of broken equipment or nix it.

I have seen this issue posted several times on the BiomedTalk listserv and brought up in some meetings. The traditional answers have been to use the expected remaining life, residual book value or the Maintenance Expenditure Limits (MEL) factor used by the military (TB MED 7, Maintenance Expenditure Limits for Medical Material, U.S. Army Medical Material Agency, Maintenance Engineering & Operations Directorate, 1992). Although these methods can provide some guidance, they tend to emphasize the past and overlook the present and future. (Meanwhile, investment counselors often caution that past performance does not guarantee future return.)

The NPV of X and Y
Consider thinking like a CFO: Should I invest (not spend) X amount of dollars to fix this unit? Or should I replace it with a brand-new one costing Y? The answer lies in comparing the NPV of these two alternatives — not just comparing X to Y. First, forget about the past, that is, how much the unit has depreciated (book value), and let’s calculate how much you expect to earn with either a repaired unit or a brand new unit.

As explained in Anderson’s article, income is calculated by determining the revenue the equipment is going to bring in as a result of providing diagnostic, monitoring, therapeutic or preventive services to patients. Include in this calculation the following factors: reimbursements from insurance companies, average use per year and equipment downtime. The last factor will be different for repaired and new equipment because older equipment tends to fail more frequently. If possible, use downtime history rather than the unit’s age, as equipment used in different locations tends to have different life spans. For example, defibrillators in emergency rooms tend to wear out sooner than those used in regular patient wards.

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