Capital Budget

Assignment 2: The Capital Budget

Due Week 6 and worth 180 points

Refer the Scenario for Assignments 1–5. Forecast salaries, revenue estimating, and prepare the capital budget.

Using the budget from the selected agency, write a five to six (5-6) page paper in which you:

1. Analyze the agency’s compensation for employees. Provide a rationale on what the costs and benefits would be for a 2 percent, 4 percent, or 5 percent pay increase for the fiscal year 2014. In your forecast, discuss the effects of the increase on benefits for the agency. (Title this section Payroll Forecast.)
2. Review the trend of the agency over the past five (5) years and prepare an analysis explaining the trend for expenditures. (Title this section Trend Analysis.)
3. Prepare and explain a five (5) year forecast of the four (4) highest expenditures. Include in the analysis whether the costs should be approved or not approved. Justify the reasoning with examples. (Title this section Expenditure Forecast.)
4. Compare two (2) options for predicting the cost of needed repairs to the current building that houses the selected agency by completing Exercise 1 at the end of Chapter 1 (page 92). Provide a rationale for recommending one (1) of the two (2) options. Include the figures to support the rationale. (Title this section Capital Budget.)
5. Provide names and URLs of the Websites for the state’s budget(s) analyzed and any other government Websites used to support the assignment’s criteria

*******EXERCISE FROM PAGE 92 TO ASSIST WITH NUMBER 4 ABOVE*********

Exercises

To complete the exercises, use the data below.
 

1. The city administration is considering refurbishing the lighting system of its administration building. After an initial investigation, the city procurement office has narrowed down the choices to the following two options:

Option 1 is an Urgolight system that costs $500,000 to purchase and install.
Option 2 is a conventional system that costs $100,000 to purchase and install.
Both systems are expected to last for 20 years.
The energy cost for option 1 is $20,000 and maintenance is $2,000 in today’s dollars.
The energy cost for option 2 is $50,000 and maintenance is $10,000, also in today’s dollars.
Assume that the discount rate is 4 percent, and all future costs are paid at end of year.

Which lighting system should the city select based on financial (LCC) considerations?

2. A city has learned that by buying larger garbage trucks, labor costs for garbage removal would be reduced. You, the analyst, have also collected the following information:

Cost of the trucks today is $400,000.
Annual savings in this year’s constant dollars is $90,000.
Trucks will last for four years, then will be sold for $100,000.
The city can borrow money (discount rate) at 7 percent.
Inflation (for the next four years) is expected to average 3 percent.

Note: All the dollar amounts are in this year’s dollars (constant dollars).
Assuming the costs and benefits incur at the end of the year, should the city buy the trucks?

3. A major urban center is planning to issue a $100 million, twenty-year, semiannual interest municipal bond for the construction of a stadium.

The interest rate is 5.875 percent, based on the economic and financial conditions of the city and city government.
The design and issuance costs are estimated to be $10 million and 1 percent, respectively.

What is the total interest paid if the city decides to adopt a level debt service structure?
How much does the city still owe on this bond at the end of each year?

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