The project investment will be included with the master budget of the entity along with the other investments. The process ends on reevaluation. Because of the long-term nature of capital investment projects, the estimates are coupled with certain risks. In view of this, an approved project must be reviewed periodically to determine if the project meets the original expectation.
During the process, certain analysis and procedures may be conducted for the evaluation. The procedures vary in every firm. Consideration should be made on the particular investment being evaluated. In evaluation of revenue and related cost, a break even analysis may be used. The focal point of this analysis is the computation of the breakeven sales, where the total revenue equals the total costs. There is neither profit nor loss. This is the point where cost should be controlled to cover projected earnings as well as generate revenue to cover projected costs.
The main concern, however, in every business engagement or project is profitability. The goal is to generate the highest amount using maximized resources. As mentioned earlier, the return on investment is the concern of capital budgeting. The rate of return on investment is the measure...
It is computed by dividing computed income over amount of investment or capital employed. Other test of profitability using the computed income may be a return on sales or a return on assets which may also be a measure of operating efficiency. Also, there is a return on average owner's equity.
Profitability is measure along with the payback period or the payout method of the project. It is a very simple evaluation approach which involves the computation of the length of time required by the project to return the initial cost of investment.
For example, if the health care organization or testing clinic buys a high optic and high resolution x-ray machine for $50,000 and the equipment is expected to generate cash inflows net of all taxes per year of $10,000. Then the payback period will be five years dividing the investment with the cash inflow per year.
Bibliography
Delta College. Health Care Organizations.
2004)
Retrieved May 14, 2007. http://www.delta.edu/hco
Mark McCracken. Capital Budgeting. (2005)
Retrieved May 14, 2007. http://www.teachmefinance.com/capitalbudgeting.html
