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Capital Expenditure Decisions: Methods and Analysis

Learn about the strategic planning process and steps of the net present value method for making long-term capital expenditure decisions. Understand the role of audits and behavioral issues in capital budgeting.

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Capital Expenditure Decisions: Methods and Analysis

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  1. Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 8 Capital Expenditure Decisions Maher, Stickney and Weil

  2. Learning Objectives (Slide 1 of 3) • Explain the reasoning behind the separation of the investing & financing aspects of making long-term decisions. • Explain the role of capital expenditure decisions in the strategic planning process. • Describe the steps of the net present value method for making long-term decisions using discounted cash flows, & explain the effect of income taxes on cash flows.

  3. Learning Objectives (Slide 2 of 3) • Explain how spreadsheets help the analyst to conduct sensitivity analyses of capital budgeting. • Describe the internal rate of return method of assessing investment alternatives. • Explain why analysts will need more than cash flow analysis to justify or reject an investment.

  4. Learning Objectives (Slide 2 of 3) • Explain why the capital investment process requires audits. • Identify the behavioral issues involved in capital budgeting.

  5. Explain Capital Budgeting

  6. What do discounted cash flow methods do? • List Two DCF methods used

  7. Define the Discount Rate Discount rate is the Appropriate discount rate has three elements. What are they?

  8. List the Steps of the Net Present Value Method

  9. Net Present Value MethodCont. • Decision rule: If the present value (PV) of cash inflows exceeds the PV of future cash outflows, the project should be accepted • Reject projects that have a negative net present value • If one project is to be chosen from a set of alternatives, select the project with the highest net present value

  10. Describe Estimating Cash Flows (Slide 1 of 4)

  11. Describe Estimating Cash Flows (Slide 2 of 4)

  12. Describe Estimating Cash Flows (Slide 3 of 4)

  13. Describe Estimating Cash Flows (Slide 4 of 4) • Tax savings from the depreciation deduction should be factored in to the analysis • Do not include noncash items such as depreciation expense • Terminal cash flows at the end of the project often include: • Cash from the salvage value of the asset • Tax arising on the gain (loss) on disposal of the project

  14. Discuss Tax Effects

  15. Sensitivity of NPV Estimates • NPV analysis is based on three types of estimates: • The amount of future cash flows • The timing of the cash flows • The discount rate • Spreadsheet programs, such as Microsoft Excel, can be used to determine how sensitive the NPV analysis is to changes in estimates

  16. Define Internal Rate of Return

  17. Investments in Advanced Production Systems • Why is it difficult to justify these types of investments using DCF?

  18. Audits and Capital Budgeting • Capital budgeting relies heavily on estimates • Comparing budgeting estimates with actual results (called auditing) provides several advantages • Identifies estimates that were wrong so planners can avoid similar mistakes in future budgeting

  19. Audits and Capital Budgeting (Cont.) • Identifies and rewards those who are good at making capital budgeting decisions • Reduces temptation to inflate estimates associated with a project

  20. If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact: • Dr. Michael Blue, CFE, CPA, CMA • blue@bloomu.edu Bloomsburg University of Pennsylvania

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