Essay: Grant Clinic, Inc.: Equipment Purchase and Capital Budget
Decisions on Capital purchases need to be done with a lot of care to ensure that the option selected is the cheapest and the best. A lot of consultations, computation and research have to be done so that there is adequate information provided for each of the options available. This way, it will be very easy to pick on the cheapest option concerning the information available. Grant Clinic, Inc. is faced with the decision of purchasing new diagnostic equipment for the radiology department. The equipment they need to purchase is readily available from two vendors. The problem they are facing is that they have to make a decision on the model to purchase since they have two models, which have different initial costs and different labor saving rates.
Considering the case of Grant Clinic, Inc., it will be possible to make computations using payback method or net present value methods to ensure that the best option is selected.
Payback method is calculated by determining the Payback period, which equals investment required divided by net annual cash inflow (Albrecht et al, 2007). In this case, investment is the initial cost installation while the net annual cash inflow is the estimated annual labor savings. Using this method, the option with the least payback period is selected. The computation is as follows;
Model A = 120,000/40,000 = 3 years
Model B = 110,000/32,000 = 3.4 years