Kế toán, kiểm toán - Chapter 8: Capital expenditure decisions

1Capital Expenditure DecisionsCHAPTER 8Managerial Accounting 11E Maher/Stickney/WeilPowerPoint Presentation by LuAnn BeanProfessor of AccountingFlorida Institute of Technology© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2CHAPTER GOALThis chapter explains how the differential principle applies to long–term decisions where the focus is on changes in operating capacity over several future time periods. Present value analysis, also called discounted cash flow (DCF), provides analysts with the appropriate technique.☼☼3CAPITAL BUDGETING: DefinitionInvolves deciding which long-term investments to take involving capital (long-term) assets.LO 14STRATEGIC PLANNINGIn strategic planning, an organization decides on major programs and the resources to devote to them. Strategic planning provides the context for capital expenditure decisions.LO 25BENEFITS: Long-Term InvestmentsReducing potential to make mistakes improves productMaking goods, delivering services that competitors cannotReducing cycle time to make productPermanently reducing costs to provide such an advantage that competitors cannot afford to enter marketLO 26DISCOUNTED CASH FLOW (DCF): DefinitionAids in evaluating investments involving cash flows over time where there is a significant difference between cash payment and receipt.LO 37ELEMENTS OF DISCOUNT RATEThe choice of a discount rate should consider the followingA pure rate of interest that reflects the productive capability of capital assetsA risk factor reflecting the riskiness of the projectAn increase reflecting inflation expected to occur over the life of the project.LO 38RISK-FREE RATE: DefinitionIs the pure interest rate plus expected inflation.LO 39What is the real interest rate?The real interest rate is the pure interest rate plus a premium for risk but no increase for inflation.LO 310NOMINAL INTEREST RATE: DefinitionIncludes all three factors: pure interest, risk premium, and expected inflation.LO 311If the present value of future cash inflows exceeds the present value offuture cash outflows for a proposal, The firm should accept the project with the largest NPV.Reject any negative PV.LO 3DECISION RULEEstimate the amounts of future cash inflows and future cash outflows in each period for each alternative Discount the future cash flows to the present using the project’s discount rate. 12CASH FLOW VARIETIESInitial cash flows: Occur at beginning of projectPeriodic cash flowsOccur during life of projectTerminal cash flowsOccur at end of projectLO 313EXAMPLE: JEP Realty SyndicatorsJEP Reality Syndicators, Inc. (JEP) is considering acquisition of computer hardware with a 5-year life. Disposal of current hardware occurs in Year 0 with no gain or loss and no tax consequences.LO 3ContinuedCost$ 100,000Market value of present equipment$ 10,000Scrap value$ 5,000JEP14LO 3EXHIBIT 8.1Projected cash flows over life of project. JEP15LO 3EXHIBIT 8.2JEPDepreciation is subtracted before tax Year 0 & Year 116LO 3EXHIBIT 8.2JEPPretax net cash inflow (outflow) – tax payable = Net cash inflow (outflow) X PV factor (12%) = NPV Year 0 & Year 117JEPEXHIBIT 8.2+++++=LO 3Projected cash flows over life of project is positive $12,469.>>>ACCEPT 18THREE ESTIMATES for Calculating NPVThe calculation of NPV for a proposed project requires three types of projectionsAmount of future cash flowsTiming of future cash flowsDiscount rateNote: errors in predicting amounts of future cash flows will likely have the largest impact.LO 419LO 4JEPEXHIBIT 8.3= $350,000 in revenues++++Base case20LO 4JEPEXHIBIT 8.3+++++Amount of future cash flows= $344,000 in revenues, less than projected21LO 4JEPEXHIBIT 8.3= $350,000 in revenues, not received as expected.+Timing of future cash flows+++22LO 4JEPEXHIBIT 8.3+++Discount rate changed to 13%+= $350,000 in revenues, but discount rate changed.23LO 5DECISION RULENet Present Value MethodInternal Rate of Return Method1. Compute the investment’s net present value, using the organization’s cost of capital adjusted for project-specific risk as the discount rate (hurdle rate).2. Undertake the investment if its net present value is positive. Reject the investment if its net presentvalue is negative.1. Compute the investment’s internal rate of return.2. Undertake the investment if its internal rate of return is equal to or greater than the organization’s cost of capital adjusted for project-specific risk (hurdle rate). If not, reject the investment.The decision to accept or reject an investment proposal can be made using either the internal rate of return method or the net present value method under most circumstances.24LO 5EXHIBIT 8.4JEP’s hurdle rate is 12%. Should they accept this project? JEP25JUSTIFYING INVESTMENTSInvestments in computer-integrated manufacturing are often difficult because of difficulties in applying discounted cash flow methods Hurdle rate too highShould be cost of capitalBias toward incremental projectsUncertainty about operating cash flowsExclusion of benefits that are difficult to quantifyMore flexibilityShorter cycle and lead timesReduction of non-value-added costsLO 626LONG-TERM INVESTMENTSThree types of long term capital investments are: Replacement and minor improvementsExpansionStrategic movesLO 627AUDITINGAuditing to compare estimates of capital budgeting projects to actual results provides advantages: Audits identify which estimates were wrong to correct in futureManagers can use audits to reward good planningAudits create environment that removes the temptation to inflate estimates and benefitsLO 728BEHAVIORAL ISSUESPlanners have a desire to implement a project, meet performance measures. This can influence their objectivity in making estimates. Additionally, conflicts may arise between criteria used to evaluate individual projects and criteria used to evaluate an organization’s overall or unit performance.LO 829End of CHAPTER 8