Grant Clinic: Equipment Purchase and Capital Budget
FIN/HC571
September 19, 2011
Dr. Joyce S. Freville

Abstract

Grant Clinic Incorporated would like to purchase new equipment for the radiology department. Dr. Grant Dunn head of the radiology department has located two pieces of equipment from two different vendors. Dr. Dunn will need to consider which vendor is offering a better deal prior to purchasing using payback, net present value, and internal rate of return method. Each piece has an estimated five-year life span with a desire payback period of three years at a 15% target rate.

Model A Model B

Cost, including installation $120,000 $110,000

Estimated annual labor savings $40,000 $32,000

Payback Methods

Payback method calculates the amount of time it will take to regain the investment in a capital asset with no regard for the time cost of money (Baker & Baker, 2006).

Payback Method Formula

Investment /net annual = years payback period

Model A payback period = $120,000 / $40,000 = 3 year payback period

Model B payback period = $110,000 / $32,000 = 3.2 years payback period

Net Present Value
Net present value (NPV) used to evaluate and analyze the reliability of an investment and its profitability for capital budgeting purposes (Accounting for Management, 2011). The difference between the present value of cash inflows and the present value of cash outflows refers to net present value (Investopedia, 2011).
NPV = Total PV of future cash flows – initial cash flow (CF0) n CFi
NPV = Σ --------------------- - CFo i= 1 (1+r )^i

r = discount rate n = time period of the project /investment An NPV greater than zero shows that the project adds value to the company, while the opposite which is lesser than zero will impact a business