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The public sector faces complex challenges when allocating financialresources in the most productive way in accordance with governmentpolicies The capital budget process in the public sector explores avariety of objectives to determine the best financial impact for thefederal state and local government entities The process choosescapital projects from a number of potential options based on severalfactors such as payback periods internal rate of return and the netpresent value for each project Each factor should work togethereffectively to ensure the greatest return in the least amount of time This paper will focus on determining the best financial outcome for acapital budget using these methods and calculations To gain anunderstanding of the capital budget process Project A and B will beanalyzed to determine which project is best for a city council Thecalculations will also help to justify each project and if both can beused simultaneously Payback Period Project A and BThe period for payback is the technique which is used measure the lengthof time that a project recoups the initial investment of the firmFollowing the technique the profits before depreciation cash flow isthe amount of time required to repay an investment while accumulatinginvestment returns Morrell 2007 The shorter payback period ispreferred because the investment costs are paid earlier allowingavailable funds for future use in addition to less risk factor According to Mikesell 2010 the shorter the payback period in yearsthe more attractive the project will appear to the firm FiscalAdministration 2010 custom edition The formula used to conduct apayback period analysis is years summed to the remaining payback yearsdivided by the net investments paid To calculate the payback period itis essential to determine the number of years before the final paybackyear remainder to be paid back at the start of the year to bring cashflow to zero and total net paid the entire year The calculated paybackyears for using the formula described
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