Kế toán, kiểm toán - Chapter 25: Capital budgeting and managerial decisions

CAPITAL BUDGETING AND MANAGERIAL DECISIONSChapter 25Capital budgeting:Analyzing alternative long-term investments and deciding which assets to acquire or sell. Outcomeis uncertain. Large amounts ofmoney are usuallyinvolved. Investment involves along-term commitment. Decision may bedifficult or impossibleto reverse.CAPITAL BUDGETINGPAYBACK PERIODThe payback period of an investmentis the time expected to recoverthe initial investment amount.Managers prefer investing in projects with shorter payback periods.P 1ACCOUNTING RATE OF RETURNP 2Choose the project with the least risk, the shortest payback period, and the highest return for the longest time period is often identified as the best. NET PRESENT VALUE Discount the future net cash flows from the investment at the required rate of return. Subtract the initial amount invested from sum of the discounted cash flows.P 3Net present value analysis applies the time value of money to future cash inflows and cash outflows so management can evaluate a project’s benefits and costs at one point in time. NET PRESENT VALUEWITH EQUAL CASH FLOWSP 3FasTrac is considering the purchase of a conveyor costing $16,000, with an 8-year useful life and zero salvage value, that promises annual net cash flows of $4,100. FasTrac requires a 12 percent compounded annual return on its investments. INTERNAL RATE OF RETURN (IRR)The interest rate that makes . . .Presentvalue ofcash inflowsPresentvalue ofcash outflows= The net present value equals zero.P 4 1. Compute present value factor.  2. Using present value of annuity table . . . Projects with even annual cash flows INTERNAL RATE OF RETURN (IRR)Project life = 3 yearsInitial cost = $12,000Annual net cash inflows = $5,000Determine the IRR for this project. $12,000 ÷ $5,000 per year = 2.40P 4Locate the rowwhere thenumber equalsthe periods in the project’s life. 1. Determine the present value factor.  $12,000 ÷ $5,000 per year = 2.40 2. Using present value of annuity table. . . INTERNAL RATE OF RETURN (IRR)IRR isapproximately12%.P 4COMPARING CAPITAL BUDGETING METHODSP 4 Decision making involves five steps: Define the decision task. Identify alternative actions. Collect relevant information on alternatives. Select the course of action. Analyze and assess decisions made.DECISION MAKINGC 1MAKE OR BUY DECISIONS Incremental costs also are important in the decision to make a product or purchase it from a supplier. The cost to produce an item must include: (1) direct materials, (2) direct labor, and (3) incremental overhead. We should not use the predetermined overhead rate to determine product cost.A 1MAKE OR BUY DECISIONSFasTrac currently makes Part 417, assigning overhead at 100 percent of direct labor cost, with the following unit cost:A 1MAKE OR BUY DECISIONSFasTrac can buy Part 417 from a supplier for $1.20. How much overhead do we have to eliminate before we should buy this part?We must eliminate $0.25 per unit of overhead,leaving a maximum of $0.25 per unit.A 1SELL OR PROCESS Businesses are often faced with the decision to sell partially completed products or to process them to completion. As a general rule, we process further only if incremental revenues exceed incremental costs.FasTrac has 40,000 units of partially finished product Q. Processing costs to date are $30,000. The 40,000 unfinished units can be sold as is for $50,000 or they can be processed further to produce finished products X, Y, and Z. The additional processing will cost $80,000 and result in the following revenues:A 1SELL OR PROCESSFasTrac should continue processing. The earlier $30,000 costfor product Q is sunk and therefore irrelevant to the decision. A 1 Qualitative factors are involved in most all managerial decisions. Quality. Delivery schedule. Supplier reputation. Employee morale. Customer opinions. QUALITATIVE FACTORS IN DECISIONSA 1END OF CHAPTER 25