Grant Clinic

Grant Clinic: Equipment Purchase and Capital Budget Scenario

Tejaswi Dhanekula, ,

January 23, 2012

FIN/HC 571

Dr. Leon Daniel Jr.

Grant Clinic, Inc.: Equipment Purchase and Capital Budget

Fixed assets and capital expenditures are vital investment decisions for any organization. Making the right decision can alter the present and future existence of Grant Clinic. Tools like the payback period, the net-present value (NPV), and the internal rate of return (IRR) help management at the Grant Clinic move in the right direction. Medical diagnostic equipment models need to be purchased and an analysis and evaluation is conducted of model A and model B using the different decision tools.

Evaluating a Capital Budgeting Project

There are three stages of a capital budgeting analysis: (1) Decision analysis that builds knowledge. If the capital project involves any production, then additional overheads, operating costs and capacity utilization have to be first understood. (2) Option pricing in order to establish position. Three common options are (a) abandoned option where the ability to get out of a project that goes bad exists. (b) timing option where having the ability to delay investment of the project exists. (c) growth option where having the ability for long term growth exists despite any negative values. (3) Discounted cash flows when making decisions on investments. Discounting takes any future amount and determines its value at the present time while inflation reduces the value over time (Schall, Geusbeek, & Sundem, 1978).

Payback Method

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Model A | -------------------------------------------------

Model B |

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Cash outflow | -------------------------------------------------

120000 | -------------------------------------------------

110000 |

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