Grant Clinic, Inc.

Upon review of Dr. Dunn’s choices for purchasing a piece of equipment for Grant Clinic, Inc. the choices have been reduced down to only two. The recommendation of the equipment piece labeled “A” is the better choice to purchase given the net present value method of calculation and a 40% percent tax charge. After having closely calculated the initial cost, expected savings, and net present value of choices “A” and “B” for purchasing and a 40% tax on the current value each year, choice “A” is recommended for purchasing by the Grant Clinic.

Several calculations that were considered for each piece of equipment are briefly discussed. They include the net present value method, payback method, and internal rate of return method. It should be noted that the net present value method was chosen over the pay back method and internal rate of return method. The reason for this choice were first, the payback method ignores the time value of money and risk differences and second, internal rate of return assumes the future cash inflows will earn the project’s internal rate of return. “So the net present value method’s assumption that the reinvestment rate will equal the cost of capital is the better assumption. And, again, the net present vale decision rule is superior to the IRR decision rule” (Emery, Finnerty, & Stowe, 2007 p. 227).

After reviewing several capital budgeting methods, equipment “A” purchase price is $120,000 with an estimated savings over the life of the equipment of five years was $40,000 with a net present value of $14,088.21. If the net present value is a positive value even after the expected value usefulness of the equipment the company should use capital budgeting to start the project (Emery, Finnerty, & Stowe, 2007). Equipment piece “B” has a purchase price of $110,000 with an estimated savings over the life of the equipment of $32,000, and a net present value of $-2,731.03. It should be noted that a positive net present value is more...