Kế toán, kiểm toán - Chapter 12: Planning investments: capital budgeting

Chapter 12Planning Investments: Capital BudgetingCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin12-*What are the Steps in the Capital Budgeting Process?Identify the opportunityRequests, opportunities, expansionSelect appropriate investmentsNet present value analysis (other methods are available)Determine how to finance the investmentsChapters 13 and 14Accept or reject the opportunity12-*What are the Steps in the Net Present Value Method of Capital Budgeting?Estimate the relevant cash inflows and cash outflowsDetermine the present value of the future cash flows using the company’s weighted average cost of capitalCompute the net present value (NPV)Accept or reject the proposalIf NPV is positive—accept (in general)If NPV is negative—reject (in general)12-*What are the Sources of Cash Inflows?Cash receipts from using the asset (net of tax)Decrease in working capital requirementsSale of old assets (net of tax)Sale of new assets at the end of the project (net of tax)Tax savings due to tax shieldNOTE: SAVINGS = INFLOW12-*What are the Sources of Cash Outflows?Increase in working capital requirementsCash expenditures from using the asset (net of tax)What is included in the initial investment?Purchase priceCosts incurred to receive the assetCosts incurred to get the asset ready for its intended use (set up)12-*12-*How is the Weighted Average Cost of Capital Determined? (% of company financed by debt * rate of interest on debt) + (% of company financed by owners’ equity * required rate of return on owners’ equity)12-*How is the NPV Determined? (Sum of the present value of cash inflows and outflows) less the cost of the initial investment12-*How do we Determine Net of Tax Amounts?Cash receipts and expendituresCash flow * (1 – tax rate)Tax shield from depreciationDepreciation amount * tax rateProceeds from sale of asset with gainProceeds – (gain * tax rate)Proceeds from sale of asset with lossProceeds + (loss * tax rate)12-*What Other Factors should be Considered?Human judgmentGoal incongruenceUncertaintyOperating leverageQualitative factorsBalanced scorecardComprehensive exampleYour company must determine whether it should purchase a machine costing $700,000 with a useful life of 20 years; it will be depreciated uniformly over its useful life. The new machine will require a working capital investment (inventory) of $80,000 that will be released at the end of the project. If the new machine is purchased, an old machine with a book value of $30,000 will be sold for $50,000. The new machine is expected to generate annual cash savings of $120,000. Your company’s cost of capital is 12% and its tax rate is 20%. Should you invest in the new machine?12-*AnswerInitial investment $(700,000)Working capital (80,000)Sale of old machine Proceed $50,000 Book value 30,000 46,000 Gain on sale $20,000 Tax (20%) $ 4,000Tax shield: $700,000/20 = 35,000 * .2 = 7,000FV = 0, r = 12, c = 1, n = 20, ANN = 7,000, PV = 52,286Annual savings: $120,000 * .8 = 96,000FV = 0, r = 12, c = 1, n = 20, ANN = 96,000, PV = 717,067Release of working capitalFV = 80,000, r = 12, c = 1, n = 20, ANN = 0, PV = 8,293NPV $ 43,64612-*