tailieunhanh - Lecture Fundamental accounting principles (19/e) - Chapter 25: Capital budgeting and managerial decisions

After completing this chapter you should be able to: Describe the importance of relevant costs for short-term decisions, evaluate short-term managerial decisions using relevant costs, analyze a capital investment project using break-even time, compute payback period and describe its use. | CAPITAL BUDGETING AND MANAGERIAL DECISIONS Chapter 25 Chapter 25: Capital Budgeting and Managerial Decisions Capital budgeting: Analyzing alternative long- term investments and deciding which assets to acquire or sell. Outcome is uncertain. Large amounts of money are usually involved. Investment involves a long-term commitment. Decision may be difficult or impossible to reverse. CAPITAL BUDGETING C 1 Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell. Careful analysis is necessary as future outcomes of today’s investments may by very uncertain. The amounts of money involved are usually large and the investment period is typically many years. Capital budgeting decisions often involve plant expansion issues, equipment selection, and equipment replacement. PAYBACK PERIOD The payback period of an investment is the time expected to recover the initial investment amount. Managers prefer investing in projects with shorter payback periods. Exh. 25-2 P 1 The payback period is the length of time it takes a project to recover its initial cost. When the annual net cash inflows are equal in each year, we can calculate the payback period by dividing the investment required by the net annual cash inflows. All other things equal, a shorter payback period is better than a longer payback period. Now let’s look at a capital budgeting model that considers the time value of cash flows. NET PRESENT VALUE FasTrac is considering the purchase of a conveyor costing $16,000 with an 8-year useful life with zero salvage value that promises annual net cash flows of $4,100. FasTrac requires a 12 percent compounded annual return on its investments. 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 3 Part I. Decisions impacting operations over a long period should recognize the time value of . | CAPITAL BUDGETING AND MANAGERIAL DECISIONS Chapter 25 Chapter 25: Capital Budgeting and Managerial Decisions Capital budgeting: Analyzing alternative long- term investments and deciding which assets to acquire or sell. Outcome is uncertain. Large amounts of money are usually involved. Investment involves a long-term commitment. Decision may be difficult or impossible to reverse. CAPITAL BUDGETING C 1 Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell. Careful analysis is necessary as future outcomes of today’s investments may by very uncertain. The amounts of money involved are usually large and the investment period is typically many years. Capital budgeting decisions often involve plant expansion issues, equipment selection, and equipment replacement. PAYBACK PERIOD The payback period of an investment is the time expected to recover the initial investment amount. Managers prefer investing in .