Chapter20A - Chapter Twenty Capital Budgeting 2 Learning...

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Capital Budgeting Chapter Twenty
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2 Explain the strategic role of capital budgeting Describe how accountants can add value to the capital budgeting process Provide a general model for determining relevant cash flows for capital expenditure analysis Apply discounted cash flow (DCF) decision models for capital budgeting purposes Learning Objectives
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3 Conduct sensitivity analysis as part of the capital budgeting process Discuss and apply other capital budgeting decision models Identify behavioral factors associated with the capital budgeting process (Appendix): Discuss some complexities associated with using DCF decision models Learning Objectives (continued)
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4 Capital investment decisions: Involve large amounts of capital outlays Provide anticipated returns (cash flows) over an extended period of time Linkage of capital investment decisions to the organization’s chosen strategy: Build strategy Hold strategy Harvest strategy Strategic Nature of Capital Budgeting Decisions
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5 Capital budgeting: The process of identifying, evaluating, selecting, and controlling capital investments Capital investments: Long-term investment opportunities involving substantial initial cash outlays followed by a series of future cash returns Capital budget: Part of the organization’s master budget (Chap. 8) that deals with the current period’s planned capital investment outlays Introductory Definitions
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6 Discounted cash-flow (DCF) decision models: Decision models (e. g., NPV and IRR) that explicitly incorporate the time-value-of-money Weighted-average cost of capital (WACC) Under normal circumstances, the discount factor used in DCF capital budgeting decision models A weighted average of the cost of obtaining capital from various sources (e.g., equity and debt) Non-discounted cash flow decision models: Capital budgeting decision models that do not incorporate the time-value-of-money into the analysis of capital investment projects Introductory Definitions (continued)
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7 Linking capital budgeting to the master budgeting process ( planning ) Linking capital budgeting decisions to the organization’s Balanced Scorecard ( control ) Generation of relevant data for investment analysis purposes ( decision making ) Conducting post-audits ( control ) How Accounting Can Add Value to the Capital Budgeting Process
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8 Project initiation: Required investment outlays, including installation costs Includes incremental net working capital commitments Project operation: Cash operating expenses, net of tax Additional net working capital requirements Operating cash inflows, net of tax Project disposal: Net of tax investment disposal Recapture of investment in net working capital Identifying Relevant Cash Flows for Capital Expenditure Analysis
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9 Decision Example Smith Company manufactures high-pressure pipe for deep-sea oil
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This note was uploaded on 02/15/2012 for the course ENGLISH 100 taught by Professor Sarah during the Spring '07 term at California State University Los Angeles .

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Chapter20A - Chapter Twenty Capital Budgeting 2 Learning...

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