Capital Budget for River County: Public Administration

¶ … Capital Budget for River County

In the current dynamic business environment, finance managers are continually faced with decisions on the best type on assets to invest in. County governments, for instance, have to analyze various investment decisions on behalf of the residents, and to estimate costs and benefits that are related to these decisions. According to Peterson and Fabozzi (2002), firms, as well as counties, should continually invest funds in assets in order to produce incomes and cash flows that will promote growth. In particular, capital assets like equipment, machinery and vehicles, which have a long estimated life, require thorough planning to ensure they give good returns on investment. Baker and English (2011) also state that it is imperative for finance managers to project the cost of capital expenditures to establish whether there is enough cash for asset acquisition and if not, consider alternative methods, such as leasing or renting.

River County is considering several acquisitions for the coming year. It plans to purchase two new garbage trucks with an estimated useful life of 10 years that will cost $150,000 each; one bulldozer with an estimated useful life of 8 years at a cost $240,000; three lawn mowers with an estimated useful life of 5 years, each costing $16,000; and it also plans to construct an activity center at a total cost of $650,000, to be used for forty years. All these represent capital expenditure since they will benefit the county for a number of years (Baker and English, 2011).

The capital budget prepared has six columns that display the items to be purchased, their quantity, their estimated useful life, the cost of each item, the total cost for the items budgeted for, and the proportion of the cash budget each item will take up, respectively. The total cost for the two garbage trucks is $300, 000 (2*$150,000); $240,000 ($240,000*1) for the bulldozer; $48,000 ($16,000*3) for the lawn mowers and $650,000 ($650,000*1) for the activity center. The county requires a total of $1,238,000 if it plans to acquire all the items that have been budgeted for. The sixth column shows the proportion of the budget that each item will take up, which is derived by dividing the total cost of each item with the total cost of all the four items budgeted for. Thus, the two garbage trucks take up 24% of the total budget ($300,000/$1,238,000); the bulldozer takes up 19% ($240,000/$1,238,000); the three lawn mowers take up $4% (48,000/$1,238,000) and the activity center, 53% ($650,000/$1,238,000). As per the capital budget, the activity center will take up most of the resources, while the three lawn mowers take the least. Therefore, the county should first establish whether it has sufficient funds to acquire all the items, and if not, Peterson and Fabozzi (2002) explain that it should consider various capital budgeting techniques to establish the items worth investing in. The various capital budgeting techniques that may be used include the average rate of return (ARR), the payback period (PB), the internal rate of return (IRR), the net present value (NPV) and the profitability index (PI). Once the capital assets that give the best return on investment are established, the county can then go ahead to determine the method of payment.