Organization-Wide Operating Budget

Capital Budget Addendum

Capital budgeting refers to the procedure of making investment choice in capital expenditure or fixed assets. The addendum will prose on various financial measures, such as why it is vital for the growth of the business and its continued solvency. The study will examine the cost of the projects and the financing option that the mental health facility can select and the rationale behind it. Further, the paper will give a viability analysis of the project.

The process of the capital budget in the mental health facility helps to discover profitable expenses. It also ensures that replacing any equipment or asset in the facility gives more return or enhances performance that earlier. According to Rae (2009), the capital budget helps to know if a specific project should be chosen or not. Also, it helps to examine the various finance sources that can finance capital expenditure and the quantum of finance needed for capital expenditure. Additionally, it will assist in analyzing the advantages of each project to select the best.

The mental health care facility has a projected loss of $105,450. The capital budget has expenses exceeding its debts, and the only way the project can be financed is by debt financing or doing the project in two financial years. The mental health facility is run by the municipality, and the best way to finance it is by using bond financing. The study proposes that the health care facility completes the ward and abolition block in the same financial period. The company has a shortage of $105,450, and it can easily raise that by offering bonds.

The psychiatric ward is an essential facility that can enhance the growth of the hospital. The ward is where the mentally challenged people live. Research shows that enhancing wards can have a positive effect on the health of a sick person. Stakeholders have been complaining about the quality of inpatient care. The complaints include congestion in the ward due to the increased number of inpatient. Thus, there is a need to add another ward to ensure that the congestion ceases and patients are able to live comfortably.

Increasing the number of wards is essential to the survival of the business. The facility will ensure that the hospital can admit more patients to increase their income for future expansion of the facility. Also, there will be increased admission due to the enriched quality of services offered in the hospital. In the future, health facility management should have collaboration with housing providers to establish a system of flats that can house more patients. The flats should help to house more patients and improve the capacity of the ward.

As the number of patients increases, the facility will need more supporting amenities to make the place a better place. The mental health care facility will need an abolition centre for hygiene purposes. The project should be carried out together with the construction of the ward to ensure that there are worthy improvements that can upgrade the status of the hospital.

Bond financing is a form of long-term borrowing that local government, corporations, and state agencies can use to raise capital to finance long-lived infrastructure assets such as buildings. The health facility can obtain the money it needs to build the ward and the abolition block by selling bonds to investors. The local government, in return, should pay the money with interest and specified installments over the years.

The rationale for selecting bond financing is that the financing is approved by the citizens through a vote. Once approved, the citizens will have the responsibility of paying the debt in the future. The financing source provides a flexible way of raising capital for projects. The debt can be secured or unsecured, and it stabilizes the firm's finances by having a considerable debt on fixed-rate interest (Dropkin, Halpin, & LaTouche, 2007). Thus, the debt will be secured against economic changes or variable interest. Also, the bond in corporations helps to avoid diluting the value of existing shareholders, unlike giving extra shares. Thus, it enables more cash to be retained in the firm as the redemption date of the bonds can happen some years after their issue.

The cost of the bond is $105,450. The organization can decide to offer a bond with an annual coupon rate of 5% to the bondholders for 5 years at a face value of $110,000. The cost of the debt plus principal amount will be $137,500 in 5 years' time. Thus, the cost of bond financing will be 5,500 annually and $27,500 in five years. Bond financing, in this case, will be financed in 5 years, and at that time, the project would have been completed.

The cost of the project would have been high if the project utilized other forms of financing, such as bank loans. For instance, it would have been 30% interest annually for five years. The cost would have been $33,000 yearly and $165,000 in five years. Thus, it is better to utilize bond financing as opposed to loans.

References