Chap012_WSM - Chapter 12 - Strategy and the Analysis of...

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Unformatted text preview: Chapter 12 - Strategy and the Analysis of Capital Investments CHAPTER 12: STRATEGY AND THE ANALYSIS OF CAPITAL INVESTMENTS QUESTIONS 12-1 Capital-budgeting decisions: (a) are long-term in nature (i.e., they affect profitability and cash flows for many years into the future), and (b) involve substantial amounts of investment funds (capital). Because of these, formal models that focus on discounted after-tax flows are needed for investment-analysis purposes. 12-2 As members of managerial decision-making teams, accountants can add value to the capital budgeting process in at least four ways: (1) ensuring linkage between the capital budgeting process and the organizations master budget; (2) ensuring linkage to the strategic plans of the organization (e.g., integrating capital budgeting into an organizations Balanced Scorecard); (3) generating relevant cash-flow estimates for capital-budgeting decision models; and (4) participating in the conduct of post-audits for capital investments. The first area relates to the planning , the second and fourth areas relate to the control function of management, while the third area relates to the decision-making function of management. 12-3 The analytic hierarchy process (AHP) is one of several multi-criteria decision-making techniques, that is, decision models that include more than a single decision criterion. As such, the model can incorporate both financial and nonfinancial (strategic) decision criteria, weighted according to managerial preferences. Dedicated software (e.g., Expert Choice ) is available to guide the process of determining the weights associated with various decision criteria and the selection of investment projects based on these criteria. The AHP has been applied successfully to numerous decision contexts. 12-4 Project Initiation: Purchase price of equipment Transportation/insurance costs for new equipment Installation costs Training costs Investment tax credits (if applicable) Gross proceeds from sale of old asset (if applicable) Tax-savings associated with deductibility of loss on sale of old asset (if applicable) Project Operation: Inflows: After-tax fees from patients/third-party payers (insurance companies, the government) Inflows: Income-tax savings due to depreciation deductions Outflows: After-tax salary, wages, and benefits for additional professional medical staff including: Physicians, Technicians, Nurses, and Clerks 12-1 Chapter 12 - Strategy and the Analysis of Capital Investments Outflows: After-tax operating expenses for the scanner, such as Utilities, Supplies, and Maintenance expenses 12-2 Chapter 12 - Strategy and the Analysis of Capital Investments Project Disposal: After-tax proceeds from sale/disposal of asset After-tax disposal costs 12-5 After 20 years of operation, the company needs to ensure that there is no residual effect on the environment before abandoning the chemical factory. Restoration of the site to remove any environmental effect to the neighborhood the factory might...
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Chap012_WSM - Chapter 12 - Strategy and the Analysis of...

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