Capital Budgeting and Investment Decisions

Running head: CAPITAL BUDGETING AND INVESTMENT DECISIONS
Capital Budgeting and Investment Decisions
Name of the Student:
Name of the University:
Authors Note:

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
Capital investment decision making process:
In order to take capital investment decisions an organization requires information about
the expected return from investment, the number of period up-to which an organization expects
to earn return from any investment option, the residual value of investment and the discounting
rate to be used to calculate net present value of different investment options (Carvalho, Meier &
Wang, 2016).
If the net present value of a project or investment option is positive then an organization will be
willing to make investment in a capital project. Opposite will be the case if the net present value
of the project is negative.
In order to assess the desirability of a project from the perspective of investors it is important to
use appropriate investment appraisal technique to find out the expected outcome of such
investment option. The investment appraisal techniques include use of internal rate of return
method, use accounting return method, net present value method and others. However, net
present value method (NPV) is the most appropriate and suitable method as it provides specific
amount after discounting the future cash flows (Shahid, Ahmad & Badar, 2017).
The importance of taking into consideration the time value analysis is the core idea behind use of
net present value method. In NPV, an appropriate rate of discount is used, generally the cost of
capital, to discount the future cash flows in relation to an capital budgeting decision to ascertain
the net present value of such capital budgeting scenario. The present value of cash flows is
reduced by the present value of initial outlays to calculate the net present value of a project. The
fact that the time value of money is an important consideration and often ignored in capital
budgeting decision is not a correct method to determine the actual outcome of an investment

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
option. Thus, it is important to use an appropriate rate of discount to discount the future cash
flows from an investment option to correctly assess the implications of investing in different
investment vehicles (Baum & Crosby, 2014).
Sooner Clinics:
In case of Sooner Clinics the appropriate calculations as provided below need to be assessed first
before taking important operating and financial decisions in relation to the organization. As per
the facts of the case the following tables have been calculated (Gotze, Northcott & Schuster,
2016).
Alternative 1:
Activity Cost Driver Volume Cost per
Unit
Total costs
Appointment scheduling Receptionist
time
3 min $
0.20
$
0.60
Patient check-in Receptionist
time
5 min $
0.20
$
1.00
Ultrasound testing Technician
time
30 min $
0.40
$
12.00
Physician time 1.5 min $
3.00
$
4.50

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CAPITAL BUDGETING AND INVESTMENT DECISIONS
Supplies per
procedure
$
9.00
$
9.00
Patient check-out Receptionist
time
5 min $
0.20
1
Film processing Technician
time
10 min $
0.40
$
4.00
Film reading Contract terms per
procedure
$
40.00
$
40.00
Billing and collection Overhead
costs
per
procedure
$
6.80
$
6.80
General administration Overhead
costs
per
procedure
$
1.25
$
1.25
Transportation, setup, and
breakdown
Technician
time
18 min $
0.50
$
80.15
Alternative II:
Activity Cost Driver Volume Cost per Total costs