6pp%20plus%20eg - Topic Objectives ACCT 2552 Week 10...

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1 ACCT 2552 Week 10 Capital Expenditure Decisions Nicole Ang Quad 3097 Topic Objectives 1. Understand nature & purpose of Cap Ex decisions 2. Be able to describe a typical Cap Ex process 3. Be able to apply & understand various techniques 4. Understand the value of audits 5. Understand the conflict introduced by using measures for project evaluation that are different from those used for manager evaluation Readings Langfield-Smith et al Chapter 21 pp. 1078-1124 Lecture Outline 1. What is capital expenditure? 2. Why invest in such resources? 3. Process of investment/approval process 3 1 Investment analysis techniques 3.1 Investment analysis techniques 3.2 Limitations 4. Management of the investment 5. Behavioural implications 6. Example 1. Capital Expenditure (obj. 1) What is it? Expenditure on resources that will generate long- term future cash-flows Relating this material to earlier topics: BPR and cost behaviour Theory of constraints Quality Key: Activities that generate value cannot be carried out if organisations do not have the resources necessary to support them. 2. Why invest in such resources? (obj. 1) Strategy Further organisation’s long-term goal for success e.g., enhancement of quality, expansion Market position Profitability Revenue generation Cost reduction Regulation Infrastructure Each of these may have a different “return”
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2 3. Process of investment (obj. 2) 1. Project generation 2. Estimation & analysis of projected cash flows 3. Progress to approval 4 A l i d l t i f j t 4. Analysis and selection of projects 5. Implementation of projects 6. Post-completion audit of projects 3.1. Investment analysis techniques (obj. 3) Consider incremental costs and benefits Incremental cash outflows initial cost operating costs over project life Incremental cash inflows cost savings additional revenues Incremental cash flows – simple example We currently own machine L If we sell it today we’ll get $1,000 for it Costs $1,000 a year to maintain Can produce 100 units a year, all can be sold Each unit uses $2 of material, can be sold for $50 We are considering replacing L with M The initial cost is $10,000 Costs $500 a year to maintain Can produce 200 units a year, all can be sold Each unit uses $1 of material, can be sold for $50 Incremental cash flows Relevant CF If we keep Machine L If we buy Machine M Increment if we buy M Initial cost Sale of L Maintenance Materials Revenue Estimating incremental cash flows More factors to consider: Inflation Working capital Opportunity costs Disposal of equipment Relevant inflows/outflows after tax More on tax – recall L and M example Relevant CF Increment Tax effect?
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6pp%20plus%20eg - Topic Objectives ACCT 2552 Week 10...

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