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Budgeting Budgeting is the primary use of accounting information in strategy formulation. Budgeting assists strategy formulation by providing managers with information about short-term and long-term planning responsibilities. Budgeting also provides expectations against which future results can be judged. Verspreiden niet toegestaan | Gedownload door Sybe klaas Kappe ([email protected])lOMoARcPSD|105219
Capital Budgeting It is the process of identifying, evaluating, and selecting projects that require commitments of large sums of funds and generate profits in the future. Large, long-term investments are referred to as capital investments. Capital budgeting involves three steps: §Project identification and definition, §Evaluation and selection, and §Monitoring and review. Capital Budgeting Techniques 1.Payback Period Represents the time it takes to recoup the initial investment. ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?=InitialInvestmentcashoutflowAfertaxcashinflowsannualAcceptable project ≤targeted project length - Ignores time value of money - Ignores total profitability of the project + Easy to use; simple and quick Verspreiden niet toegestaan | Gedownload door Sybe klaas Kappe ([email protected])lOMoARcPSD|105219
2.Return on Investment (ROI) Represents average annual return on the initial investment in % ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?=AverageannualnetincomeInitialInvestmentAcceptable project ≥predetermined rate - Ignores time value of money - Ignores potential subsequent cash – outflows - Projects with lower return than targeted rejected while still can be profitable for the whole company + Easy to use; % appealing to users + Easy comparable/benchmarked + Predetermined rate is known = e.g. the cost of capital 3.Net Present Value (NPV) Represents the sum of discounted net cash flows from the project. Verspreiden niet toegestaan | Gedownload door Sybe klaas Kappe ([email protected])lOMoARcPSD|105219
4.Internal Rate of Return (IRR) Verspreiden niet toegestaan | Gedownload door Sybe klaas Kappe ([email protected])lOMoARcPSD|105219
Multinational Capital Budgeting Capital budgeting in an international context is complicated by several factors. These factors relate primarily to the risk associated with future cash flows. These risks are generally categorized as political risk, economic risk, and financial risk. Taxes, import duties, dividend restrictions, and cash flow limitations imposed by governments also must be considered. Political Risk Likelihood that political events will impact cash flows. This risk can vary significantly from one country to another. Nationalization and expropriation of assets is the most extreme form of political risk. Political risk is also associated with changes in foreign exchange controls, repatriation restrictions, tax rules, and labor laws.