Grant Clinic

Grant Clinic, Inc: Equipment Purchase and Capital Budget
James Pavetto, Jenn Roberts, Seapa Stovall
January 28, 2012
Douglas McFadden

      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,...