Capital Budgeting and Qualitative Measures.

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Intermediate Management Accounting: Capital Budgeting and Qualitative Measures. “One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery and so on, in anticipation of being able to earn an income greater than the funds committed”. (Investment Appraisal sheet). A Capital Budgeting Process essentially defined as, “the process by which the financial manager decides whether to invest in specific capital projects or assets” (Capital Budgeting, Decision Process, Procedure, definition) is put in place within companies in order to sift through and make decisions regarding viable major investments. The various stages of the Capital Budgeting Process are (a) Forecasting investment decisions; (b) Identifying projects to meet needs; (c) Appraising the investments; (d) Selecting the best alternatives; (e) Making the expenditure; (f) Monitoring projects. (Investment Appraisal sheet). There are also various components of the process which include, the initial investment outlay, which is the initial cash outflow on the purchase of an asset less the net cash proceeds from the disposal of the replaced asset; Net cash savings or benefits or savings from operations; Terminal cash flow; and the NPV technique. (Capital Budgeting, Decision Process, Procedure, definition). Management accounting uses the Net Present Value (NPV) technique, which in simple terms practices an explicit comparison of the returns from a specific project with the relevant opportunity cost of capital, to appraise and manage investment decisions. NPV is an indicator of how much value an investment adds to the firm. (Net Present Value, 2009) If companies are to be undertaking successful projects, there needs to be an emphasis on qualitative measures as well. The most relevant among them for firms is the competitive advantage that they can gain from the project. To build competitive advantage a firm first needs to create superior customer value, followed by positioning the firm, by investing in a set of mutually reinforcing activities. It then needs to build and extend that position in due course or at the very least sustain it in today’s technologies and dynamic markets. Competitive advantage can be broken down roughly into two aspects, namely Strategy and Operational Effectiveness. There is a key difference between the two. Doing similar activities at par or better than rivals imply Operational Effectiveness, whereas Strategic Positioning is differentiating the approach in doing similar activities, or doing different activities as compared to rivals. (Sheelvant) Management accounting is an important tool used to achieve a company’s strategic objectives. (Ansari, Bell, Klammer, & Lawrence)“Strategy is the way that a firm positions and distinguishes itself from its competitors. Positioning refers to the selection of target customers or markets. Distinctions are made on the three dimensions of quality, cost, and time.” (Ansari, Bell, Klammer, & Lawrence). The way a company positions itself can be seen in the example of the Southwest Airlines. A regular full service airline promises its passengers a variety of services; like numerous destination choices, connecting flights, first or business class service and full service airline meals, among others. In contrast “Southwest has staked out a unique and valuable strategic position based on a tailored set of activities. On the routes served by Southwest, a full service airline could never be as convenient or as low cost.” (Porter, 1996). Its planes fly for longer hours than its rivals. Southwest does not offer any of the services provided by other airlines, thereby keeping its costs low. A Strategic outlook can also be perceived in the case of the Intel Corporation who is a designer and producer of microprocessors and related systems, networking and infrastructure products. It invests strategically in creating world-wide...
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