Grant Clinic
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Grant Clinic, Inc: Equipment Purchase and Capital Budget
James Pavetto, Jenn Roberts, Seapa Stovall
FIN/HC571
January 28, 2012
Douglas McFadden
Summary
Dr. David Dunn is the head of the radiology department. Dr. Dunn has asked Team C to review his budgeting decision on the organizations capital purchases. Dr. Dunn has chosen two equipment pieces offered by two vendors, vendor A, and vendor B. Team C has decided to recommend vendor A. The selections were reviewed given the net purchase value method of calculation, 40% tax charge on the current value each year, initial cost, and expected savings to the organization.
Team C calculated both pieces of equipment. The pieces included the net present value, internal rate of return (cost of capital), and payback method (University of Phoenix, 2011). Team C must decide which method to choose from. The net present value is the difference between what something is worth and what it costs (Emery, Finnerty, & Stowe, 2007). The internal rate of return is the project’s expected return, if the cost of capital equals the IRR, the NPV equals zero (Emery, Finnerty, & Stowe, 2007). Last, the payback method finds the length of time it takes to recover the initial investment, without regard to the time value of money (Emery, Finnerty, & Stowe, 2007). In reviewing the three methods, Team C will choose the net present value because the method measures the value the project will create, and assumes that the reinvestment rate will equal the cost of capital (Emery, Finnerty, & Stowe, 2007).
The budget method with vendor A, has the purchase price of $120,000 with an estimated annual labor savings over the life of the equipment of five years is $40,000 with a net present value of $14,088. The purchase price for vendor B has a price of $110, 000 with an estimated annual labor savings over the life of equipment of $32,000, and the net present value of -$2729.6. Team C recommends that if the net present value is positive,...
James Pavetto, Jenn Roberts, Seapa Stovall
FIN/HC571
January 28, 2012
Douglas McFadden
Summary
Dr. David Dunn is the head of the radiology department. Dr. Dunn has asked Team C to review his budgeting decision on the organizations capital purchases. Dr. Dunn has chosen two equipment pieces offered by two vendors, vendor A, and vendor B. Team C has decided to recommend vendor A. The selections were reviewed given the net purchase value method of calculation, 40% tax charge on the current value each year, initial cost, and expected savings to the organization.
Team C calculated both pieces of equipment. The pieces included the net present value, internal rate of return (cost of capital), and payback method (University of Phoenix, 2011). Team C must decide which method to choose from. The net present value is the difference between what something is worth and what it costs (Emery, Finnerty, & Stowe, 2007). The internal rate of return is the project’s expected return, if the cost of capital equals the IRR, the NPV equals zero (Emery, Finnerty, & Stowe, 2007). Last, the payback method finds the length of time it takes to recover the initial investment, without regard to the time value of money (Emery, Finnerty, & Stowe, 2007). In reviewing the three methods, Team C will choose the net present value because the method measures the value the project will create, and assumes that the reinvestment rate will equal the cost of capital (Emery, Finnerty, & Stowe, 2007).
The budget method with vendor A, has the purchase price of $120,000 with an estimated annual labor savings over the life of the equipment of five years is $40,000 with a net present value of $14,088. The purchase price for vendor B has a price of $110, 000 with an estimated annual labor savings over the life of equipment of $32,000, and the net present value of -$2729.6. Team C recommends that if the net present value is positive,...