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Lecture Introduction to managerial accounting: Chapter 12 - Folk, Garrison, Noreen

Chpater 12 - Capital budgeting decisions. After studying Chapter 12, you should be able to: Determine the acceptability of an investment project using the net present value method, prepare a net present value analysis of two competing investment projects using either the incremental-cost approach or the total-cost approach, rank investment projects in order of preference using the profitability index,. | Capital Budgeting Decisions Chapter12 Capital Budgeting How managers plan significant outlays on projects that have long-term implications such as the purchase of new equipment and introduction of new products. Typical Capital Budgeting Decisions Plant expansion Equipment selection Equipment replacement Lease or buy Cost reduction Typical Capital Budgeting Decisions Capital budgeting tends to fall into two broad categories . . . Screening decisions. Does a proposed project meet some present standard of acceptance? Preference decisions. Selecting from among several competing courses of action. Time Value of Money Business investments extend over long periods of time, so we must recognize the time value of money. Investments that promise returns earlier in time are preferable to those that promise returns later in time. Time Value of Money A dollar today is worth more than a dollar a year from now since a dollar received today can be invested, yielding more than a dollar a year from now. Interest and the Time Value of Money If $100 is invested today at 8% interest, how much will you have in two years? At the end of one year: $100 + 0.08 $100 = (1.08) $100 = $108 At the end of two years: $108 + 0.08 $108 = (1.08) $108 = (1.08) [(1.08) $100] = (1.08)2 $100 = $116.64 Interest and the Time Value of Money If P dollars are invested today at the annual interest rate r, then in n years you would have Fn dollars computed as follows: Fn = P(1 + r)n Interest and the Time Value of Money The present value of any sum to be received in the future can be computed by turning the interest formula around and solving for P: Interest and the Time Value of Money A bond will pay $100 in two years. What is the present value of the $100 if an investor can earn a return of 12% on investments? P = $100 (0.797) P = $79.70 Interest and the Time Value of Money A bond will pay $100 in two years. What is the present value of the $100 if an investor can earn a return of 12% on investments? Present | Capital Budgeting Decisions Chapter12 Capital Budgeting How managers plan significant outlays on projects that have long-term implications such as the purchase of new equipment and introduction of new products. Typical Capital Budgeting Decisions Plant expansion Equipment selection Equipment replacement Lease or buy Cost reduction Typical Capital Budgeting Decisions Capital budgeting tends to fall into two broad categories . . . Screening decisions. Does a proposed project meet some present standard of acceptance? Preference decisions. Selecting from among several competing courses of action. Time Value of Money Business investments extend over long periods of time, so we must recognize the time value of money. Investments that promise returns earlier in time are preferable to those that promise returns later in time. Time Value of Money A dollar today is worth more than a dollar a year from now since a dollar received today can be invested, yielding more than a dollar a year from .