Kế toán, kiểm toán - Chapter 9: Capital investment analysis

Chapter 9 Capital investment analysis1 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by ObjectivesDescribe the two types of capital investment decisions with which managers may be faced:Accept or reject decisionsCapital-rationing decisionsDescribe the method of calculation of non-discounting models:Payback periodAccounting rate of return2 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Objectives (continued)Explain the advantages and limitations of non-discounting models.Explain the importance of the time value of money in capital budgeting decisions.Describe the method of calculation of discounting models:Internal rate of returnNet present valueExplain the advantages and disadvantages of discounting models.3 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Objectives (continued)Apply appropriate long-term decision-making techniques to practical situations involving:the acquisition of non-current assetsthe replacement of existing equipmentleasing or buying.4 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Capital investment decisionsAccept or reject decisions:Decision determined on a individual basisAccept if it meets the predetermined criteria.Capital-rationing decisions requiring ranking of multiple decisions:simultaneousranked in order or preferencepredetermined criteriausually rate of return.5 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Non-discounting modelsAccounting rate of return (ARR) involves net profit after tax in relation to the investment tied up in the asset.Investment may be initial or average depending on the asset.6 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Non-discounting models (continued)Payback period involves determining howlong it will take future cash flow from theasset to generate the cash to pay for thecost.7 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Non-discounting models (continued)Advantages of accounting rate of return:The data is easily obtainable from relevant financial statements.Calculations are relatively easy.Results are easily understood by the average person.8 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Non-discounting models (continued)Limitations of accounting rate of return:It accounts for only profits and not cash flows.It does not account for the timing of profits.It may not be consistent with the goals of maximisation of shareholder wealth because it does not discount cash flows.It does not distinguish between projects of differing magnitudes. 9 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Non-discounting models (continued)Advantages of the payback period:Calculations are not difficult.Results are easy to understand.This method uses net cash flows not just profits.10 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Non-discounting models (continued)Limitations of the payback period:it does not account for profitit does not account for cash flows beyond the pay back periodit does not account for the time value of moneyit does not distinguish between projects of differing magnitudes.it may not be consistent with the goal of maximising shareholder wealth.11 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Time value of money in capital budgeting decisionsTime value of money is the act of analysingcosts and revenues by expressing all flows ofprofit or cash in a common time frame.Amounts paid or received are generally expressed in present value terms.Present value terms are considered to be discounted, because money loses value with time.12 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Calculation of discounting modelsNet Preset Value (NPV)NPV = Original cost + PV of net cash inflowsInvolves calculating the PV of all expected inflows and subtracting from the PV of outflows for a project.Positive NPVThe project is achieving the desired rate of returnNegative NPVThe project is not returning sufficiently to justify consideration13 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Calculation of discounting models (continued)Internal rate of return:When the NPV is equal to zero, the rate of return is being achieved.14 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Advantages and disadvantages of discounting modelsThe advantages for NPV and IRR are:all flows are compared at the same point in timeprojects with differing lives may be comparedboth models may be used in replacement decisions.15 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by Advantages and disadvantages of discounting models (continued)The disadvantages of NPV and IRR are:the difficulty of determining future cash flowsthe difficulty of determining the rate that is to be used for discountinghaving to use a financial calculator or appropriate tables.16 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business – A non-accountant’s guide 2/e by