Kế toán, kiểm toán - Chapter 20: Capital expenditure decisions: An introduction

Chapter 20Capital expenditure decisions: an introduction1Capital expenditure decisionsLong-term decisions requiring the evaluation of cash inflows and outflows over several years to determine the acceptability of the projectSignificant impact on the competitiveness of the businessFocus on specific projects and programs2Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithThe capital expenditure approval processProject generationOften initiated by managers in business unitsConsistent with strategic plan and corporate guidelinesEvaluation and analysis of projected cash flowsOver the life of the projectDifficult to detect biases in estimates of cash flowscontinued3Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithThe capital expenditure approval processProgress to approvalThe larger the project the high is the authority level for approvalA political process may take place due to strong competition for project approvalInitiators need to justify and ‘sell’ the projectAnalysis and selection of projects by senior managementcontinued4Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithThe capital expenditure approval processImplementation of projectsMay involve the construction or purchase of new assets, staff training, new staffPost-completion audit of projectsA year or more after the project is implementedEvaluation of accuracy of the initial plan and cash flowsOutcomes of the project5Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithTechniques for analysing capital expenditure proposalsConsider costs and benefits of the projectCash outflowsThe initial cost of the project and operating costs over the life of the projectCash inflowsCost savings and additional revenues and any proceeds of sale of assets that result from a projectcontinued6Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithTechniques for analysing capital expenditure proposalsTechniquesPayback methodAccounting rate of returnDiscounted cash flow (DCF) techniquesDCF techniques explicitly consider the time value of money7Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-Smith8Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithDiscounted cash flow analysisA technique used in investment decisions to take account of the time value of moneyMakes future cash flows equivalent to those in the current yearTypes of DCF methods includeNet present value (NPV)Internal rate of return (IRR)9Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithNet present value methodCalculates the present value of future cash flows of a projectStepsDetermine cash flows for each year of the proposed investment Calculate the net present value (NPV) of each cash flow using the required rate of returnCalculate the NPV in totalProject is acceptable on financial grounds if NPV is positive10Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-Smith11Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithInternal rate of return (IRR) methodActual economic return earned by the project over its lifeThe discount rate at which the NPV of the cash flows is equal to zeroCan be determined manually or using a financial calculator or software continued12Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithInternal rate of return (IRR) methodcontinued13Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithInternal rate of return (IRR) methodStepsDetermine cash flows for each year of the proposed investment Calculate the IRRIf IRR is greater than the required rate of return, the project is acceptable on financial grounds14Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithComparing NPV and IRR methodsNPV has many advantages over IRREasier to calculate manuallyAdjustments for risk possible under NPVNPV will always yield only one answerNPV overcomes unrealistic reinvestment assumption required for IRRReinvestment assumptionCash flows available during the life of a project are assumed to be reinvested at the same rate as the project’s rate of return.15Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAssumptions underlying discounted cash flow analysisTwo important assumptionsThe year-end timing of cash flowsThe certainty of cash flows Determining required rate of returnUsually based on the firm’s weighted average cost of capitalCan be adjusted to take account of the risk of a particular project16Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithLeast cost decisionsCapital expenditure may be approved even when there is a negative NPV, or less than acceptable IRRQualitative concerns may be driving the investmentSelect the course of action that has the lowest cost17Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithDepreciable assetsNPV and IRR focus on cash flowsDeprecation charges are not cash flowsWhere a business is liable for income taxes, depreciation is a tax deductionReduction in taxation due to depreciation has cash flow implications18Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithComparing two alterative investment projectsNPV and IRR may give different rankings for alternative projectsDue to reinvestment assumption of IRRNPV results in correct rankingStrategic and competitive concerns must be considered in any decisiion19Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithOther techniques for analysing capital expenditure projectsPayback methodAccounting rate of returnThese methods do not take account of the time value of money20Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithPayback methodThe amount of time it will take for the cash inflows from the project to accumulate to cover the original investmentPayback periodInitial investment / annual cash flowThe simple formula will not work if a project has uneven cash flow patternsUse cumulative cash flows21Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-Smith22Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithPayback: pros and consTwo drawbacksIgnores the time value of moneyIgnores cash flows beyond the payback periodWidely used for several reasonsSimplicity Useful for screening investment projectsCash shortages may encourage short paybackProvides some insight as to the risk of a project23Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAccounting rate of return methodFocuses on the incremental accounting profit that results from a projectAccounting rate of returnAverage annual profit from project / initial investmentAccounting rate of return is effectively an average annual ROI for an individual project24Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAccounting rate of return: pros and consAdvantages of the accounting rate of returnSimple way to screen investment projectsConsistent with financial accounting methodsConsistent with profit-based performance evaluationConsiders the entire life of the projectMajor disadvantage Ignores the time value of money25Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAccountant’s role in capital expenditure analysisProvide accurate cash flow projects, consideringHistorical accounting dataMarket conditionsEconomic trendsLikely reactions of competitorscontinued26Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithAccountant’s role in capital expenditure analysisMore accurate projections can be made byIncreasing the required rate of return to match the level of uncertaintySensitivity analysisSensitivity analysisTo determine how much cash flow estimates would have to change for a decision not to be supported27Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithPost-completion auditsReviews a past capital expenditure project by analysing the actual cash flows generated and comparing them with the expected cash flowsProvides feedback on the accuracy of initial estimates, and help in the control of operationscontinued28Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithPost-completion auditsHelps managersUndertake periodic assessments of outcomesMake adjustments where necessaryControl cash flow fluctuationsAssess rewards for those involvedIdentify under-performing projects29Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithPerformance evaluation: a behavioural issuePotential conflict between criteria for evaluating individual projects and those used to evaluate the overall performance of managersA manger may reject a project with a positive NPV, when it will reduce divisional profits in early year of the project30Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-Smith