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RSM322 TopicE - 1 2 Agenda Capital Expenditures Capital...

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2/9/2011 1 Topic E Capital Budgeting in Canada While you are waiting, please take out and display your name cards 1 Agenda Capital Expenditures & Capital Budgeting Capital Budgeting Models Discounted Cash Flow Models Other Decision Models Expectations for Group Presentations 2 Capital Expenditures Capital investments are any project that: Has future benefits that extend over more than one year Involves large commitment of organizational resources Has higher risk Capital investments usually involve major investments in capital assets This results in changes to structural or executional/organizational driven costs 3 Capital Budgeting Capital budgeting is the process of identifying, evaluating, selecting and controlling capital investments The formal process for capital budgeting is largely related to the company’s overall strategy as well as the general conditions of the market or industry Capital budgeting decisions will change based on whether the strategy is to build, hold or harvest 4
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2/9/2011 2 Capital Budgeting Strategic cost management contributes to capital budgeting in four main ways: The capital budget is part of the master budget that is used to control a company’s expenditures The capital budget is used to achieve a company’s overall strategy The relevant data used in capital budgeting is cost accounting information The capital budgeting process must be controlled and improved where required 5 Relevant Data The data for capital budgeting must include: Only relevant data Cash inflows and outflows Time value of money Income tax effects In Canada, accounting depreciation is NOT deductible for tax purposes like it is shown in your textbook Make sure to read and understand the Topic E handout 6 Decision Models Capital budgeting
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