Paper Example - Capital Budget Addendum

The achievement of an organization is a clear picture of the profit earned by the key stakeholders and the enterprise's management (Srithongrung, 2017). The results are based on the various managerial tasks and activities within the organization. These activities within the organization mainly include planning and regulation of the enterprise’s financial resources. Management of finances is concerned with making decisions that include financing, investment, and dividends. A firm has to strive based on the many objectives and goals that it has set. An increase in the company's market value to its key shareholders and partners is the most widely acceptable objective for the firm’s partners (Farrar, 2020). This paper aims to prepare a capital budget addendum for Walter Reed Psychological Center since it is a necessity for continuous solvency and development of the enterprise.

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Capital budgeting is a formula by which managers in organizations can plan investment projects in the long run (Ogujiuba & Ehigiamusoe, 2014). In this regard, it will take all the possible considerations into account so that a particular organization evaluates the returns of the project. Therefore, in this case, a capital budget addendum can be used by the enterprise to evaluate capital investment projects such as the purchase of equipment and rebuilding of equipment. The returns from an investment can occur in the form of reduced cost or, on the other hand, increased revenue.

All businesses mainly exist to make profits apart from the non-profit-based organization (Farrar, 2020). Capital budgeting is crucial for every enterprise as it has a great effect on the business's growth and success in the long run. It is the basis of accountability and measure. Many known techniques are profitability index, payback period, present worth value, internal rate of return, and accounting rate of return. It creates accountability & measurability. It implies that a wrong decision made by a certain company is likely to be disastrous for the long-term survival of the firm (Ogujiuba & Ehigiamusoe, 2014). A capital budget addendum impacts a long period. Additionally, it impacts the company’s future and cost and growth as well. A capital investment requires a company to be in a position to generate more funds to be used in the budget. If the company happens to have limited resources, it will have to make a wise and correct investment decision. Nevertheless, the wrong decision made by the company would harm the sustainability of the business.

Organizations and establishments, in the long run, have to make profits and grow as a goal (Farrar, 2020). We are founded on the set expenses on the best conditions, the workers, facilities, and employees that were acquired to provide the best services that are quality (Ogujiuba & Ehigiamusoe, 2014). There are a need and necessity of an organization to set a profit goal speculatively while at the same time considering ethics. Ethical considerations include; not overcharging customers to offer them services. The enterprise should not take any advantage of its environment as a means to exploit customers. This capital budget addendum will help the Walter Reed Psychological Centre for the firm's solvency and development. The enterprise is a multidisciplinary and behavioral health facility on practice that deals with people suffering from mental health problems, substance abuse, and psychological problems. Management's primary goal is to make quality health services sustainable while making profits from the sale of services.

This particular capital budget addendum recommends mortgages and loans as financing option. However, finding a proper financing option in an economical platform can be very challenging. Mortgage and loans are an excellent financing option, and thus, making the right mortgage plan is a top priority in making capita budget addendum. The reason for choosing these financing options is because it fits the company’s unique needs and preferences.

Return on Investment Analysis

To make a precise return investment analysis, it is good to have in mind that if the previous budget shows a profit and you are a non-profit 501c3 company, there is an excess profit placed in a particular earmarked bank account for a capital improvement project (Ogujiuba & Ehigiamusoe, 2014). In this regard, 100% of the excess profit is applied. However, if the budget is for a profit entity, the profit needs to be spent in various ways, but a tax of 33% is subtracted in the final budget (Dayananda et al., 2002). Since the aim of the Walter Reed Psychological Centre organization is prosperity and growth, therefore, the organization is a profit entity. In this regard, a return on investment analysis helps evaluate the efficiency of Walter Reed Psychological Centre organization.

Example of a Viable Analysis of Capital Budget Addendum for Construction Components

Financial Year 2020 Budget

• Architectural and technical Design $4,500
• Construction $115,000
• Tenant development Allowances $10,000
• Heat and Cooling Systems $3,600
• Property Management and rental Negotiations $2,200
• Telephone Data System $2,000
• Contingency $10,000
• Total $147,300

As from the table above, a budget of $ 147, 300 for the building would be appropriate. However, this budget would be financed my acquiring mortgages and loans. Since this is a profit entity, it implies that a 33% tax needs to be subtracted in the final budget.

References

Dayananda, D., Irons, R., Harrison, S., Herbohn, J., & Rowland, P. (2002). Capital budgeting: Financial appraisal of investment projects. Cambridge University Press.

Farrar, S. (2020). Optimization models in capital budgeting. Tax and Optimal Capital Budgeting Decisions, 93-107.

Ogujiuba, K. K., & Ehigiamusoe, K. (2014). Capital budget implementation in Nigeria: Evidence from the 2012 capital budget. Contemporary Economics, 8(3), 293-314.

Srithongrung, A. (2017). Capital budgeting and management practices: Smoothing out rough spots in government outlays. Public Budgeting & Finance, 38(1), 47-71.