Lecture Management accounting: An Australian perspective: Chapter 20 - Kim Langfield-Smith

Lecture Management accounting: An Australian perspective - Chapter 20 introduce the capital expenditure decisions. This chapter include objectives: The capital expenditure approval process, techniques for analysing capital expenditure proposals, discounted cash flow analysis,...
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Lecture Management accounting: An Australian perspective: Chapter 20 - Kim Langfield-Smith Chapter 20 Capital expenditure decisions: an introductionCopyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-SmithCapital expendituredecisions Longtermdecisionsrequiringthe evaluationofcashinflowsandoutflows overseveralyearstodeterminethe acceptabilityoftheproject Significantimpactonthecompetitivenessof thebusiness FocusonspecificprojectsandprogramsCopyrightª2003McGrawHillAustraliaPtyLtd, 2The capital expenditureapproval process Projectgeneration Ofteninitiatedbymanagersinbusinessunits Consistentwithstrategicplanandcorporate guidelines Evaluationandanalysisofprojectedcash flows Overthelifeoftheproject Difficulttodetectbiasesinestimatesofcash flows continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 3The capital expenditureapproval process Progresstoapproval Thelargertheprojectthehighistheauthority levelforapproval Apoliticalprocessmaytakeplaceduetostrong competitionforprojectapproval Initiatorsneedtojustifyand‘sell’theproject Analysisandselectionofprojectsbysenior management continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 4The capital expenditureapproval process Implementationofprojects Mayinvolvetheconstructionorpurchaseofnew assets,stafftraining,newstaff Postcompletionauditofprojects Ayearormoreaftertheprojectisimplemented Evaluationofaccuracyoftheinitialplanand cashflows OutcomesoftheprojectCopyrightª2003McGrawHillAustraliaPtyLtd, 5Techniques for analysingcapital expenditure proposals Considercostsandbenefitsoftheproject Cashoutflows Theinitialcostoftheprojectandoperatingcosts overthelifeoftheproject Cashinflows Costsavingsandadditionalrevenuesandany proceedsofsaleofassetsthatresultfroma project continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 6Techniques for analysingcapital expenditure proposals Techniques Paybackmethod Accountingrateofreturn Discountedcashflow(DCF)techniques DCFtechniquesexplicitlyconsiderthetime valueofmoneyCopyrightª2003McGrawHillAustraliaPtyLtd, 7Copyrightª2003McGrawHillAustraliaPtyLtd, 8Discounted cash flowanalysis Atechniqueusedininvestmentdecisionsto takeaccountofthetimevalueofmoney Makesfuturecashflowsequivalenttothose inthecurrentyear TypesofDCFmethodsinclude Netpresentvalue(NPV) Internalrateofreturn(IRR)Copyrightª2003McGrawHillAustraliaPtyLtd, 9Net present value method Calculatesthepresentvalueoffuturecash flowsofaproject Steps Determinecashflowsforeachyearofthe proposedinvestment Calculatethenetpresentvalue(NPV)ofeach cashflowusingtherequiredrateofreturn CalculatetheNPVintotal Projectisacceptableonfinancialgroundsif NPVispositiveCopyrightª2003McGrawHillAustraliaPtyLtd, 10Copyrightª2003McGrawHillAustraliaPtyLtd, 11Internal rate of return (IRR)method Actualeconomicreturnearnedbythe projectoveritslife ThediscountrateatwhichtheNPVofthe cashflowsisequaltozero Canbedeterminedmanuallyorusinga financialcalculatororsoftware continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 12Internal rate of return (IRR)method n Ct p n t 1 (1 r ) continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 13Internal rate of return (IRR)method Steps Determinecashflowsforeachyearofthe proposedinvestment CalculatetheIRR IfIRRisgreaterthantherequiredrateofreturn, theprojectisacceptableonfinancialgroundsCopyrightª2003McGrawHillAustraliaPtyLtd, 14Comparing NPV and IRRmethods NPVhasmanyadvantagesoverIRR Easiertocalculatemanually AdjustmentsforriskpossibleunderNPV NPVwillalwaysyieldonlyoneanswer NPVover ...