accg301
ACCG301: Organisational Planning and Control
LECTURE 11
Capital Budgeting Decisions
Chapters 21: Management Accounting (6e) Langfield-Smith
Dr. Ranjith Appuhami
Department of Accounting and Corporate Governance accg301@mq.edu.au Learning Outcomes
1. Recognise the multiyear focus of capital budgeting
2. Understand the stages of capital budgeting and approval process for a capital expenditure project
3. Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal-rate-of-return (IRR) method
4. Use and evaluate the payback method (PB)
5. Use and evaluate the accounting rate-of-return (ARR) method 6. Income taxes and capital expenditure analysis
7. Post-completion audits
Capital Budgeting
• Capital budgeting involves investment decisions in projects that spans multiple years.
– A good investment decision
• One that raises the current market value of the firm’s equity, thereby creating value for the firm’s shareholders
– Capital budgeting involves
• Comparing the amount of cash spent on an investment today with the cash inflows expected from it in the future
– Time value of money
• A dollar received today is worth more than a dollar received tomorrow
– Apart the timing issue, there is also an issue of the risk associated with future cash flows
• Since there is always some probability that the cash flows realized in the future may not be the expected ones
Types of Projects
•
•
•
•
Brand new line of business
Expansion of existing line of business
Replacement of existing asset
Independent vs. Mutually Exclusive
– Independent projects – if the cash flows of one are unaffected by the acceptance of the other – more than one project may be accepted.
– Mutually exclusive projects – if the cash flows of one project can be adversely impacted by the acceptance of the other – accept one or the other.
BRIDGE VS.
BOAT
Stages of Capital Budgeting and Capital
LECTURE 11
Capital Budgeting Decisions
Chapters 21: Management Accounting (6e) Langfield-Smith
Dr. Ranjith Appuhami
Department of Accounting and Corporate Governance accg301@mq.edu.au Learning Outcomes
1. Recognise the multiyear focus of capital budgeting
2. Understand the stages of capital budgeting and approval process for a capital expenditure project
3. Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal-rate-of-return (IRR) method
4. Use and evaluate the payback method (PB)
5. Use and evaluate the accounting rate-of-return (ARR) method 6. Income taxes and capital expenditure analysis
7. Post-completion audits
Capital Budgeting
• Capital budgeting involves investment decisions in projects that spans multiple years.
– A good investment decision
• One that raises the current market value of the firm’s equity, thereby creating value for the firm’s shareholders
– Capital budgeting involves
• Comparing the amount of cash spent on an investment today with the cash inflows expected from it in the future
– Time value of money
• A dollar received today is worth more than a dollar received tomorrow
– Apart the timing issue, there is also an issue of the risk associated with future cash flows
• Since there is always some probability that the cash flows realized in the future may not be the expected ones
Types of Projects
•
•
•
•
Brand new line of business
Expansion of existing line of business
Replacement of existing asset
Independent vs. Mutually Exclusive
– Independent projects – if the cash flows of one are unaffected by the acceptance of the other – more than one project may be accepted.
– Mutually exclusive projects – if the cash flows of one project can be adversely impacted by the acceptance of the other – accept one or the other.
BRIDGE VS.
BOAT
Stages of Capital Budgeting and Capital