Kế toán, kiểm toán - Chapter 16: Capital expenditure decisions

Capital Expenditure DecisionsChapter 16Discounted-Cash-Flow AnalysisCost reductionPlant expansionEquipment selectionLease or buyEquipment replacementNet-Present-Value MethodPrepare a table showing cash flows for each year,Calculate the present value of each cash flow using a discount rate,Compute net present value,If the net present value (NPV) is positive, accept the investment proposal. Otherwise, reject it.Net-Present-Value MethodMattson Co. has been offered a five year contract to provide component parts for a large manufacturer.Net-Present-Value MethodAt the end of five years the working capital will be released and may be used elsewhere by Mattson.Mattson uses a discount rate of 10%.Should the contract be accepted?Net-Present-Value MethodAnnual net cash inflows from operationsNet-Present-Value MethodMattson should accept the contract because the present value of the cash inflows exceeds the present value of the cash outflows by $85,955. The project has a positive net present value.Internal-Rate-of-Return MethodThe internal rate of return is the true economic return earned by the asset over its life.The internal rate of return is computed by finding the discount rate that will cause the net present value of a project to be zero.Internal-Rate-of-Return MethodBlack Co. can purchase a new machine at a cost of $104,320 that will save $20,000 per year in cash operating costs. The machine has a 10-year life.Internal-Rate-of-Return MethodFuture cash flows are the same every year in this example, so we can calculate the internal rate of return as follows: Investment required Net annual cash flows = Present value factor $104, 320 $20,000= 5.216Internal-Rate-of-Return Method $104, 320 $20,000= 5.216 The present value factor (5.216) is located on the Table IV in the Appendix. Scan the 10-period row and locate the value 5.216. Look at the top of the column and you find a rate of 14% which is the internal rate of return.Internal-Rate-of-Return MethodHere’s the proof . . .Comparing the NPV and IRR MethodsInternal Rate of ReturnThe cost of capital is compared to the internal rate of return on a project.To be acceptable, a project’s rate of return must be greater than the cost of capital.Net Present ValueThe cost of capital is used as the actual discount rate.Any project with a negative net present value is rejected.Comparing the NPV and IRR MethodsThe net present value method has the following advantages over the internal rate of return method . . .Easier to use.Easier to adjust for risk.Assumptions Underlying Discounted-Cash-Flow AnalysisAll cash flows aretreated as thoughthey occur at year end.Cash flows are treated as ifthey are knownwith certainty.Cash inflows areimmediatelyreinvested atthe requiredrate of return.Assumes aperfectcapitalmarket.