04 May WHAT IS EXACTLY CAPITAL BUDGETING DECISION?
healthcare organizations should use ARR to make capital budgeting decisions. For instance, lets start by What is exactly capital budgeting decision? Is defined as the firms decision to invest its current funds most efficiently in the long-term assets in anticipation of an expected flow of benefits over a series of years.
When it comes to the use of accounting rate of return (ARR) or also known as the return of investment (ROI) this is the ratio of the average net operating after-tax profit divided by the average investment itself. The average investment would be equal to half of the original investment if it where depreciated constantly. It can be found out by dividing the total of the investments book values after depreciation by the life of the project. In general, the higher ROI is considered the better.
In order to base my opinion on why I disagree healthcare organizations should not use ARR to make capital budgeting decisions is due to the fact that is has serious shortcomings. Cash flow is ignored as the ARR method uses accounting profits, not cash flows, in appraising projects. Also, time value is ignored as the averaging of income ignores the time value of money. Arbitrary cut-off is also another fact why I disagree. The firm employing ARR ruse uses an arbitrary cut-off yardstick. Usually this yardstick is the firms current return on its assets.
Student #2
I believe that healthcare organizations should use Accounting Rate of Return (ARR) to make capital budgeting decisions. Healthcare organizations should use ARR because according to the textbook, Accounting Rate of Return “is simple to use and understand; it can be readily calculated from accounting data, unlike NPV and IRR; and it incorporates the average of the entire stream of income as opposed to looking at individual years.” Accounting Rate of Return should be used to make capital budgeting decisions for healthcare organizations because it could save healthcare workers time. ARR also allows them to look at their overall average income to make better decisions and evaluate their investment profitability.
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