The purpose of this proposal report is to provide background information on capital budgets and analysis of the capital budget prepared for River County. In addition, this report provides considerations that the county must take into account for going ahead with the investment.
Organizations prepare capital budgets mainly for planning out their capital requirements and resource allocation. The use of capital budgets is common and justified on the basis of the information that could be presented in a specified format for a better understanding of long-term business requirements (Finkler, 2010). Capital budgets provide both financial and non-financial information related to expected cash inflows and outflows of a business. This information is provided over a period of projection either on a quarterly basis or annually. Cash inflows are generally in the form of cash receipts resulting from the use of the company’s assets. Cash outflows, on the other hand, are cash payments that the company makes for acquiring these assets or upgrading / maintaining them. The non-financial information included in the capital budget covers the justification of capital investment, time schedule, and estimated lifetimes of capital investments (Finkler & McHugh, 2008). This information is used for carrying out the capital budgeting process to estimate the feasibility of capital investment based on its expected net cash flows.
In the case of River County, its proposed capital investments for the next year have been considered for the preparation of a capital budget. The capital budget is presented in the following:
The capital budget above provides relevant information pertaining to the capital investment decisions that River County is considering. The first column provides a list of capital items that the company plans to acquire. The time schedule set for these investments i.e. next year. Information related to the exact dates of completion of acquisitions is not available, which could have also been added to the above budget table. The third column indicates the number of units that the county aims to acquire. The fourth column is the estimated life of capital items listed in the budget. Since there is no salvage value of any item, therefore, it has not been indicated. The next column indicates the per-unit cost of each capital item. The prices of each capital item have been received from various vendors, which are then used for calculating the total cost of each capital item presented in the fifth column. It is clear that the costs of two garbage trucks, one bulldozer, three lawn movers are $300,000, $240,000, and $48,000 respectively. Moreover, the construction of the activity center will cost the county $650,000. These costs are added in the last column for calculating the total cost. It is budgeted that the county will require $1,238,000/- for capital investment in the coming year. This funding requirement needs to be assessed and planned out by the county as it will need to raise this amount from either its own equity or external funding.
Although River County operates as a non-profit organization, it can rent out some of these capital items to private organizations for use, which could help the county to raise equity for its operations. The capital budget prepared above does not provide information related to cash inflows that may arise from the use of these capital items. Therefore, it could be suggested that further financial information is required for capital budgeting and analysis. Moreover, for capital budgeting analysis the county needs to determine the cost of capital, which is the cost of funds that it will require for completion of capital investment.
Reference List
Finkler, S. A. (2010). Financial management for public, health, and not-for-profit organizations (3rd ed.). Upper Saddle River, NJ: Pearson Prentice Hall.
Finkler, S. A., & McHugh, M. L. (2008). Budgeting Concepts for Nurse Managers. Philadelphia, PA: Elsevier Health Sciences.