Financial Evaluation of Grant Clinic Inc.

Equipment Purchase and Capital Budget – Grant Clinic Inc.

Grant Clinic, Inc. (GCI) has decided to add diagnostic equipment to its radiology department, and has narrowed choices down to two models offered by different vendors. It is time to purchase the model considered as the best financial investment. The decision will be based on calculating the payback method, net present value, and internal rate of return while incorporating a five-year budget plan. Capital budgeting has a pivotal role and associated risks “dramatically demonstrated by comparing the initial cash outflow…to that of the relatively much smaller expected periodic future cash inflows” (Emery, Finnerty, and Stowe, 2007, p. 216).

Payback Method

Payback controls liquidity because it rejects excessively long-term projects and assists managers in evaluating whether to invest in equipment purchases. The method calculates the “length of time required for cash coming in from an investment to equal the amount of cash originally spent when the investment was acquired” (Baker and Baker, 2006, p. 103).

Model A has a cost installation of 120,000 and an estimated annual labor savings of 40,000. The calculated payback method (120,000/ 40,000) determines that the payback is 3 years. Model B has a cost installation of 110,000 and an estimated annual labor savings of 32,000. The calculated payback method (110,000 / 32,000) determines that the payback will take 3.44 years. The desired payback period is 3 years, making Model A the better choice.

Net Present Value

Net present value (NPV) is a calculation that is used to determine if an investment is worthwhile or if the desired return on the investment is not likely to be realized. ). Health care organizations use NPV in capital budgeting to assess the profitability of an investment or a project extending more than a year. Model A has an initial cost of $120,000 with an annual savings on labor of $40,000. Model B has an initial cost of $110,000 and annual...