Professional Documents
Culture Documents
Week10 CapitalBudgeting
Week10 CapitalBudgeting
Chapter 11
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 1
Capital Budgeting
2. Choose an investment.
3. Follow-up or “postaudit.”
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 2
Payback Model
P = I ÷ Incremental inflow
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 3
Payback Model Example
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 4
Accounting Rate-of-Return Model
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 5
Accounting Rate-of-Return
Example
Assume the following:
Investment is $6,075.
Useful life is 4 years.
Estimated disposal value is zero.
Expected annual cash inflow
from operations is $2,000.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 6
Accounting Rate-of-Return
Example
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 7
Discounted-Cash-Flow
Models (DCF)
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 8
Net Present Value Model
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 9
Net Present Value Model
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 10
Applying the NPV Method
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 11
Net Present Value Model
Discounting cash-flow
- Comparing future cash-flows in the present value
Year
0 1 2 3 4
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 12
NPV Example
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 13
NPV Example (pg 475)
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 14
NPV Example
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 15
Calculating the PV Factor
At a discount rate of 10%, the PV Factor for Year 1:
1
0.9091
1 0.1
At a discount rate of 10%, the PV Factor for Year 2:
1
2
0.8264
(1 0.1)
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 16
Calculating the Annuity Factor
At a discount rate of 10%, the Annuity PV Factor
for Years 1-4:
Years PV Factor
1 .9091
2 .8264
3 .7513
4 .6830
Annuity PV Factor 3.1698
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 17
Decision Rules
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 21
Sensitivity Analysis Example
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 22
Sensitivity Analysis Example
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 23
Relevant Cash Flows for NPV
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 24
Operating Cash Flows
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 25
Cash Flows for Investment
in Technology
Suppose a company has a $10,000
net cash inflow this year
using a traditional system.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 27
Post Audit
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 36
Exercise 11-45 (Page 506)
Bob’s Big Burgers is considering a proposal to
invest in a speaker system that would allow its
employees to service drive-through customers.
The cost of the system (including the installation of
special windows and driveway modifications) is
RM30,000. Jenna, manager of Bob’s, expects the
drive-through operations to increase annual sales
by RM25,000, with a 40% contribution margin ratio.
Assume that the system has an economic life of 6
years, at which time it will have no disposal value.
The cost of capital (required rate of return) is 12%.
Ignore taxes.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 37
Exercise 11-45 (Page 506)
What is the payback time?
Annual addition to profit = 40% x $25,000 = $10,000.
Payback period is $30,000 ÷ $10,000 = 3 years.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 39
Exercise 11-45 (Page 506)
Compute the net present value.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 40
Exercise 11-45 (Page 506)
Should Jenna accept the proposal? Why or why not?
Yes, accept the proposal because of positive NPV.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 11 - 41