Business Analytics in Capital Budgeting. Capital budgeting is a planning procedure that business institutions use to decide which of the available investment opportunities will generate enough income to achieve the highest return on capital. Capital budgeting is important for various reasons. First, investments chosen have to be worth purchasing since most are long-term ventures. The organisation also needs to forecast revenue over the period when the asset will be in use. To make this decision wisely, the firm needs to have an objective. For most businesses, their main driving force is profit maximization. There are several tools that can be used in capital budgeting. These include payback period, net present value and internal rate of return (Gad, 2015) Microsoft Excel’s Solver tool is an efficient tool for capital budgeting. Companies use it to select the best projects to undertake using a limited capital budget. It is suited to make several decisions in the best possible manner while satisfying a number of predetermined logical constraints (Fylstra, Lasdon, Watson & Warren, 1998). In this case, the Microsoft Excel add-on is used to determine projects that will produce the maximum net present value. To begin the procedure, one needs to type the names of all projects into the rows. It is advisable to start some few rows below, say row six in order to leave space on top for other additional computations. The first column is titled “Decision”. This is where the final output will appear, the determinant of whether to consider the project or not. The user creates a worksheet with a list of projects on the rows. The first column contains the Net Present Value for each project. The next set of columns contains the amount of capital that will to cater for the project for the years under investment (Fylstra, Lasdon, Watson & Warren, 1998). The user also indicates the total amount of capital available for utilisation. The next set of columns contains the amount of labour to be used and the total amount available. The procedure applies the technique of binary changing sells to make selection (Winston, 2015). This normally assigns the numbers 0 or 1 to cells. If a project’s outcome is 0, the organisation rejects it. If the binary changing cell equals 1, the organisation undertakes to do the project. To set up the solver to perform such an operation, one needs to select the changing cells they want by including a limit. This is done by selecting the cells under consideration then choosing “bin” from the Add Constraint Dialog box. After constructing the worksheet, the user is set to begin the project selection. He/she will need to select the target cell, changing cells and constraints to work with. The target cell contains Net Present Value for each of the projects. The changing cells are those below the first blank column that was named “Decision”. They will contain the binary values 1 or 0. For the constraint, one has to ensure that the capital and ...

1. Business Analytics in Capital Budgeting.
Capital budgeting is a planning procedure that business
institutions use to decide which of the available investment
opportunities will generate enough income to achieve the
highest return on capital. Capital budgeting is important for
various reasons. First, investments chosen have to be worth
purchasing since most are long-term ventures. The organisation
also needs to forecast revenue over the period when the asset
will be in use. To make this decision wisely, the firm needs to
have an objective. For most businesses, their main driving force
is profit maximization. There are several tools that can be used
in capital budgeting. These include payback period, net present
value and internal rate of return (Gad, 2015)
Microsoft Excel’s Solver tool is an efficient tool for capital
budgeting. Companies use it to select the best projects to
undertake using a limited capital budget. It is suited to make
several decisions in the best possible manner while satisfying a
number of predetermined logical constraints (Fylstra, Lasdon,
Watson & Warren, 1998). In this case, the Microsoft Excel add-
on is used to determine projects that will produce the maximum
net present value.
To begin the procedure, one needs to type the names of all
projects into the rows. It is advisable to start some few rows
below, say row six in order to leave space on top for other
additional computations. The first column is titled “Decision”.
This is where the final output will appear, the determinant of
whether to consider the project or not. The user creates a
worksheet with a list of projects on the rows. The first column
contains the Net Present Value for each project. The next set of
columns contains the amount of capital that will to cater for the
project for the years under investment (Fylstra, Lasdon, Watson
& Warren, 1998). The user also indicates the total amount of
capital available for utilisation. The next set of columns
contains the amount of labour to be used and the total amount

2. available.
The procedure applies the technique of binary changing sells to
make selection (Winston, 2015). This normally assigns the
numbers 0 or 1 to cells. If a project’s outcome is 0, the
organisation rejects it. If the binary changing cell equals 1, the
organisation undertakes to do the project. To set up the solver
to perform such an operation, one needs to select the changing
cells they want by including a limit. This is done by selecting
the cells under consideration then choosing “bin” from the Add
Constraint Dialog box.
After constructing the worksheet, the user is set to begin the
project selection. He/she will need to select the target cell,
changing cells and constraints to work with. The target cell
contains Net Present Value for each of the projects. The
changing cells are those below the first blank column that was
named “Decision”. They will contain the binary values 1 or 0.
For the constraint, one has to ensure that the capital and labour
used in each year of operation is equal to or less than the
amount of capital and labour available (Fylstra, Lasdon, Watson
& Warren, 1998). The user will achieve this by typing the
constraint indicating that the cells containing total for capital
and labour required is less than or equal to the cells containing
the total amount available, for instance F3:K3<=F5:J5.
The user needs to compute the annual capital, labour and Net
Present Value for each financial year (Winston, 2015). To get
the total Net Present Values for all the formula
SUMPRODUCT(Decision, NPV) will apply, placed on the cell
one wants the value of total Net present Value. NPV represents
the range of cells containing NPV value for each project. . For
every project with 1, the formula picks up its NPV, while
leaving out those with 0 since they will not be included in the
portfolio. The same formula is pasted while working out the
total for capital and labour to be utilised. Instead of range for
NPV, the user keys in the range of cells containing capital and
later labour for each project. For instance, SUMPRODUCT
(Decision, F7:F30).

3. The aim of the company is to maximize the Net Present Value
of selected projects. The constraint mentioned earlier on is what
makes the changing cells binary. If the constraint is met, The
binary number is automatically 1. If total of capital or labour to
be used is less than what is available, the binary becomes 0. To
add the constraint, one needs to click Add in the Solver
Parameters dialog box and then select Bin. A dialogue box for
Add Constraint appears and then the user sets up the binary
changing cells that will display the binary numbers after
clicking on solve. The maximum NPV is the total NPV for the
approved projects.
Excel Solver has brought a revolution in determining the
capital budget. It is an efficient method that takes advantage of
a computer’s fast processing capability to quickly analyse the
different provisions for various projects to come up with the
best. It saves on time, as one only needs to know basic Ms
Excel skills like formulae. It also reduces paperwork and gives
a lasting solution to former manual computation methods.
Solver ensures accuracy since it computes based exactly on the
constraint that one enters. In addition to that, the Net present
value method used accounts for the time value of money. This is
considerably reliable since it discounts future cashflows.
The Solver method however has some drawbacks. The
method operates on the computer “Gabbage in Gabbage out”
slogan. If one enters the constraint inaccurately, keys any
formula, or values wrong, he or she is bound to get the wrong
output. This could be hazardous to a firm, as a wrong decision
in creating a portfolio would mean encountering losses in
future. It is even more risky in this case as Excel involves
computing a series of values at a go. Another drawback for this
method is that the Net Present Values are estimated future cash
flows of the portfolios (Jan, 2013). These may not be close to
the real results. Thus, the projects selected could be based on
false value right from the start.
Current methods used to make capital budgeting decisions are
relatively efficient though the investment industry could still

4. use better and more accurate decisions. In future, researchers
should come up with techniques that accounts for factors such
as inflation. Inflation is the drop of in currency value of a
country which causes increase in prices of commodities over
time. It affects investment appraisal in several ways. It leads to
changes in values of expenditure and future cash flows. Despite
the fact, it is not accounted for in appraisal decisions in most
firms.
They assume that I the event of inflation, both net revenues and
costs of the project will rise proportionately hence it will have
no impact (Bora, 2013). However, this is untrue. Inflation
affects cashflows and discount rate. In reality, selling price of
products and costs of production respond differently to
inflation. Managers should make inflation adjustments
consistently. Output prices should be more than the expected
inflation rate to prevent losses. Otherwise, it is possible to
forego a profitable investment plan. Future research should
therefore consider inflation adjustments for accuracy.
In conclusion, every firm wants a capital budget that will make
use of minimal resources while maximizing costs. This calls for
capital budgeting to determine which investment plans will be
most efficient. The Excel Solver is an efficient tool of
determining the most viable projects. It allows the user to set a
budget constraint that assigns binary values to each project.
Finally, he/she is able to select the portfolio that will be most
profitable. It is a quick way to perform capital budgeting.
Currently most methods used in investment appraisal do not
account for the impact of inflation, yet it affects investments.
Future researchers should generate tools that account for
inflation to obtain more accurate results.
References
Bora, B. (2013). Inflation Effect on Capital Budgeting
Decisions. International Journal of Conceptions on
Management and Social Sciences. 1(2) 2357-2787
Fylstra, D., Lasdon, L., Watson, J., & Waren, A. (1998). Design

5. and use of the Microsoft Excel Solver. Interfaces, 28(5), 29-55.
(Fylstra, Lasdon, Watson & Warren, 1998)
Jan, I. (2013). Net Present Value (NPV).
Retrieved from: accountingexplained.com/managerial/capital-
budgeting/npv
Gad, S. (2015). Capital Budgeting: Capital Budgeting Decision
Tools. Retrieved from
www.investopedia.com/university/capitalbudgeting/decision-
tools.asp
Winston, W. L. (2015). Using Solver for Capital Budgeting.
Retrieved from https:/support.office.com/en-nz/article/Using-
Solver-for-capital-budgeting-dff4743d-72e4-49d5-a917-
19d437efae88>
Dr. Martin’s Office
1
Seeking a Referral
The professor was not feeling well. In fact, on that Tuesday
afternoon, he had felt
tired and generally “down” physically. During the fifteen-
minute drive home from
work, he developed slight nausea and gastric discomfort. When
he reached home he headed
for the bathroom. For the next several hours, he experienced
severe diarrhea and recurring
waves of nausea and vomiting. After a few hours, the nausea
had subsided somewhat, but the
gastric distress persisted through most of what proved to be a

6. long night.
On the following morning, the professor called the office of his
primary care physician, Dr.
Martin. Dr. Martin’s nurse, Betty, came on the line. The
professor detailed his physical
problems of the previous night. “Betty, the nausea is pretty
much gone, but the gastric
discomfort is quite severe. I really feel that I need to see a
doctor.” Betty replied, “Dr. Martin is
booked solid all day, so it would be hard to see him.”
“Betty,” the professor said, “I really feel that I need to see a
doctor. Suppose I go to the
HealthCheck Clinic. It’s close by, and I’ve always gotten good
service there. Could the doctor
refer me so that the University’s insurance would cover the
visit?”
Betty’s voice took on a doubtful and clinical tone. “The doctor
would not refer you to the clinic.
However, I can ask him to prescribe something for the diarrhea.
We’ll call your pharmacy and
place the prescription.”
Slightly perturbed, the professor said, “But I don’t understand.
My wife and I have
always gotten good service at HealthCheck. Why can’t he refer
me there?”
Betty’s clinical tone sharpened. “The doctor would not refer
you to the clinic. The
medicine should help you, though. I will call it in to the
pharmacy.” It was obvious
that it would do little good to continue the conversation, and as
he was getting a little upset by

7. the tone that Betty used, the professor said, “Thank you,” and
hung up. “Thanks for nothing,”
he thought to himself.
Collecting Some Information
As the professor thought about the conversation, he got angrier.
He did not like being told that
he could not choose his own health provider, given that his
primary care provider was not
available. Besides, HealthCheck was much less expensive than
the hospital emergency room. He
decided to call the Employee Benefits Office at the University
to get their views on the episode.
His call was taken by Wendy, the Assistant Director of Staff
Benefits.
1
©Jeffrey S. Harper, Ph.D., CFE and William H. Moates, Ph.D.,
both of The School of Business, Indiana State University, Terre
Haute, IN
47809.
The professor related the background of the situation to Wendy
and described the results of
the call to Dr. Martin’s office. Wendy expressed surprise that a
doctor who was an approved
primary provider with the University’s health plan would refuse
to approve someone going to
HealthCheck if the doctor could not see the patient. “If you can
hold on a minute, I’ll ask Candy
about it,” she said.

8. Candy was the Director of the Employee Benefits Office. After
a minute Wendy came back on
the phone. “Candy said she was surprised and distressed that
Dr. Martin would not refer you to
HealthCheck, especially since you requested this. The idea
behind the recent changes in the
University’s health care plan was to cut costs, and this action
was certainly cheaper than the
hospital’s emergency room. After all, the University’s plan is
self-insured. The faculty and staff
ultimately pay all the bills. Professor, Candy said that we could
call the doctor’s office if you
wanted us to.”
The professor replied, “No, that’s not necessary at this point. I
can call them myself if I need to.
I’ll go ahead and get the medicine that Martin prescribed and
take it from there. If I need your
help, I’ll call.” Wendy agreed, wished the professor well, and
hung up.
The professor drove to the pharmacy that he used and picked up
his medicine. The charge was
just over U.S. $10. Returning home, he took a pill and went to
bed. He did not go to work that
day.
Trying Again
On Thursday, the professor felt somewhat better, and the
diarrhea was more under control.
However, the stomach discomfort continued to be a pronounced
problem. He went to work
that morning. By early afternoon, however, he gave up trying to
work and went home. He then
called Dr. Martin’s office. When Betty came on the phone, the

9. professor explained his ongoing
problem, which seemed to be getting worse. “Could the doctor
see me this afternoon, Betty?”
the professor asked.
“Dr. Martin is not in the office this afternoon,” Betty said. The
professor expressed his
disappointment. Then he repeated his earlier request to be
examined by one of the other
doctors in the office. Betty replied, “The doctor would not refer
you to another doctor for this
problem.” The professor replied, “But you told me yesterday
that he was booked solid, and I
couldn’t see him. Furthermore, he would not refer me to
HealthCheck.” Betty responded, “We
would have had to have you come in yesterday and wait until we
could work you in to see him.”
The professor continued, “So you’re telling me that he is not in
the office and can’t see me, yet
he wouldn’t refer me to another doctor or to HealthCheck.
Betty, I really feel that I need to see
a doctor. What would he want me to do?”
“I believe he would want you to go to the emergency room,”
Betty stated. The professor said in
a stunned voice, “The emergency room? Why not HealthCheck?
He’s on the staff of the hospital
which owns HealthCheck.” “I don’t think he would want you to
go there,” she replied.
The professor was angry, and stated that he found this
suggestion to be decidedly

10. unhelpful. “Thanks for your time,” he stated and hung up the
telephone in disgust once again.
Taking Action
“To heck with this,” the professor growled to himself. He
stalked out of the house, got in his
car, and drove the two miles to the HealthCheck clinic. Entering
the facility, he explained to the
receptionist the reason for his visit. She asked him to sit down
in the lobby. Almost as quickly as
he sat down, a nurse called him to enter the treatment area and
led him to an examination
room. “What seems to be the problem,” she asked as she took
his blood pressure. The
professor reviewed his experience of the last two days. “Dr.
Martin is my primary care
physician. When he couldn’t see me, he did not want to refer me
to HealthCheck. I don’t
understand that,” he said.
The attendant looked quite surprised. “I don’t understand that,
either,” she agreed. “You just
lie down. Someone will be right in to look at you.”
Within two minutes, a nurse practitioner named Hilda entered
the room. She briefly explained
her role in the medical hierarchy. He had seen her before, and
had no problem with having her
conduct the exam. After looking at the professor’s chart, she
used a stethoscope to listen to his
stomach. “Oh my,” she exclaimed. “Your stomach is just
gurgling.” She checked a few other
visible symptoms before speaking again. Then she said, “I’m
going to have the nurse take a
blood sample to check for bacteria or viruses.” The professor
asked, “Will you have to send the

11. sample out?” “No,” Hilda replied. “We have the equipment right
here.”
The nurse returned to the examination to draw blood. Then the
professor was left
alone for about 25 minutes. Hilda then returned with the nurse.
“It’s a virus,” she proclaimed,
shaking her head. “There’s nothing to do but wait it out,
although it is likely close to running its
course. I want to check for internal bleeding to be sure that’s
not a problem, though.”
After checking him, Hilda told the professor that there was no
sign of internal bleeding. “I’m
going to prescribe some medicine for you. I want you to go
home and stay there for seventy-
two hours. Do not go to work tomorrow; you’re contagious.”
The professor gratefully thanked Hilda and the nurse. He drove
home and called his wife to ask
her to stop by the pharmacy and pick up his medicine on her
way home from work. She came
home in about an hour, and the professor immediately took the
recommended dosage. Within
an hour there was noticeable improvement in his condition, and
within two hours he felt
almost normal. He slept well that night.
A Final Discussion with Betty
By late Friday morning, the professor felt fine. His stomach
problems seemed to be a thing of
the past. However, he was still wondering why Dr. Martin
would not send him to HealthCheck.
He called Dr. Martin’s office and asked to speak to Betty. When
she came on the line, he told

12. her that on the previous day he had decided to go to
HealthCheck rather than to the
emergency room.
“The nurse practitioner on duty examined me and took a blood
sample. She determined that
the problem was viral in nature and prescribed medicine. The
medicine did the trick, and my
stomach feels much better this morning.” Betty said she was
glad that he was feeling better.
The professor continued. “I’m still curious about one thing,
however. Given the satisfactory
treatment I received last night and the fact that the doctor is on
staff at the hospital which
owns HealthCheck, why was he so unwilling to refer me to that
clinic?” Betty replied, “The
doctor just didn’t feel that you would get the best care there.”
The professor asked, “Then I
suppose he won’t refer me there so my insurance will pick up
the bill?” Betty sounded
skeptical. “I will ask him about it again, but I doubt he will
approve it.”
Thanking her for her time, the professor hung up. Next he called
Wendy in the Staff Benefits
Office at the University. He brought her up-to-date on his
experience of the last couple of days.
He then asked her for her thoughts on the situation.
“I’m really surprised that he wanted you to go to the emergency
room,” she said.
“That is the kind of thing we hoped to avoid when we adopted
the primary care plan. I would

13. think Dr. Martin would know this since he is an approved
provider. I’m sorry you had so much
trouble, and I will tell Candy what happened.”
The professor thanked Wendy and hung up the phone. He
reflected on the events
that had transpired over the last few days with mixed emotions.
It seemed that he had been
caught between the University’s health care plan and Dr.
Martin’s office and staff. He
wondered about the consistency between the goals of each of
the parties in monitoring and
protecting his health. He also wondered how much of the cost of
his treatment would come out
of his own pocket.
Discussion Questions
1. Who is the customer in this case?
2. Describe the supply chain of this health care delivery system.
Also, identify
the roles of the primary players.
3. Knowing who the customer is, and considering present
customer service
levels, what are the implications for supply chain redesign and
for
optimization of good customer service while keeping costs in
check?
4. Discuss the ethical issues involved in the doctor’s refusal of
referral to the
HealthCheck clinic.