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ACCT618 Managerial Accounting For Capital Budgeting Technique

Answer:

The existing capital budget technique of the business is provided below:

The individuals are required to submit the demand with the department.
The requests that are received by the department are reviews and ranked.
The requests that are considered unnecessary are removed from the list.
Then all the Equipment Request form is filled and additional documents are attached with the form.
The master list is then reviewed and approved by the board of trustees
The capital requests are evaluated subjectively and the financial consequences are taken into consideration.
The current capital budgeting techniques of the business have certain shortcomings. The current capital budgeting technique does not use any qualitative analysis (Wijaya et al. 2015). It is suggested that the business should use the capital budgeting technique like net present value and internal rate of return for evaluating the projects of the business. Then after that, the projects are scored so that the business can evaluate them for implementation (Kaplan and Atkinson 2015).


P.E.T

Details/Years

0

1

2

3

4

5

6

7

8

9

10

Investment in Cyclotron

 $ (1,400,000.00)

 

 

 

 

 

 

 

 

 

 

Investment in Cameras

 $ (2,000,000.00)

Facility renovation

 $    (400,000.00)

Revenue - research scans

 $  1,190,000.00

 $  1,254,909.09

 $  1,323,358.68

 $  1,395,541.88

 $  1,471,662.34

 $  1,551,934.84

 $  1,636,585.83

 $  1,725,854.14

 $  1,819,991.64

 $  1,919,263.92

Revenue - clinical scans

 $  1,360,000.00

 $  1,434,182.32

 $  1,512,410.94

 $  1,594,906.59

 $  1,681,901.99

 $  1,773,642.60

 $  1,870,387.24

 $  1,972,408.86

 $  2,079,995.30

 $  2,193,450.09

Operating expenses

 $ (1,700,000.00)

 $ (1,700,000.00)

 $ (1,700,000.00)

 $ (1,700,000.00)

 $ (1,700,000.00)

 $ (1,700,000.00)

 $ (1,700,000.00)

 $ (1,700,000.00)

 $ (1,700,000.00)

 $ (1,700,000.00)

Cash flows

 $ (3,800,000.00)

 $     850,000.00

 $     989,091.41

 $  1,135,769.62

 $  1,290,448.47

 $  1,453,564.34

 $  1,625,577.44

 $  1,806,973.07

 $  1,998,263.01

 $  2,199,986.95

 $  2,412,714.01

Discounting factor

0.92

0.85

0.79

0.73

0.67

0.62

0.58

0.53

0.49

0.45

Discounted Cash flow

 $ (3,800,000.00)

 $     785,503.67

 $     844,685.46

 $     896,351.05

 $     941,147.83

 $     979,672.08

 $  1,012,472.95

 $  1,040,056.05

 $  1,062,886.78

 $  1,081,393.51

 $  1,095,970.32

Table 1: PET Cash flow Analysis

(Source: Created by Author) 

In this case, two options are available for evaluation one is new medical facility PET and another is laundry. The projects are evaluated based on the Net Present Value technique of capital budgeting. The NPV technique highlights the net income that the project will generate to the business in the whole lifetime (Otley and Emmanuel 2015).  In this case, the calculation above shows that the NPV of the PET is $5490139.71. On the other hand, the NPV of the laundry is $1062245.40. Therefore, on comparing the two projects based on the NPV it can be seen that the NPV of the PET project is more than the NPV of the laundry projects. The difference between the NPV of the two projects is $4877894.32. There are other alternative techniques for evaluating the project like IRR. The Internal rate of return is compared with the cost of capital to make the investment decision. If the IRR of the business is more than the cost of capital then the project should be accepted and if the IRR is less than the cost of capital then the project should be rejected (Fullerton et al. 2013). In this case, the IRR of Laundry is 13.7% and the IRR of PET is 20.5%. Based on the above the discussion and applying the different capital budgeting techniques it can be concluded that the business should be accept the PET project.   

Reference

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1), pp.50-71.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Wijaya, R.E., Ludigdo, U., Baridwan, Z. and Prihatiningtias, Y.W., 2015. Paradigm Blurred: Opera Cake in Management Accounting Information Research. Procedia-Social and Behavioral Sciences, 211, pp.859-865.


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