Kế toán, kiểm toán - Chapter 21: Further aspects of capital expenditure decisions

Chapter 21Further aspects of capital expenditure decisions1Income taxes and capital expenditure analysisIn profit-seeking firms income taxes are usually payableTaxation payments are cash flows Taxation implication must be considered in any cash flows arising from a capital expenditure proposal2Copyright  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-SmithAfter-tax cash flowsAfter-tax cash flowsCash flows after all the tax implications have been taken into accountcontinued3Copyright  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-SmithAfter-tax cash flowsTax effect of an increase in salesConsider incremental revenue and cots rising from a capital expenditure decisioncontinued4Copyright  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-SmithAfter-tax cash flowsTax effect of incremental cash inflowcontinued5Copyright  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-SmithAfter-tax cash flowsNon-cash expensesSuch as depreciationAre not cash flows Can produce tax savings and, hence, savings in cash outflowscontinued6Copyright  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-SmithAfter-tax cash flowsSome cash flows do not appear on the profit statement in the same period in which they occurPurchase of a depreciable asset is a cash out-flow in the period of purchase, but not an expense of the current periodCash outflows from purchase have no direct tax consequencescontinued7Copyright  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-Smithcontinued8Copyright  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-SmithAfter-tax cash flowsTiming of tax paymentsCash flows resulting from income taxes do not occur in the same year as the before-cash flowsTiming of cash flows Cash flows from a proposal are not always recognised as revenue or expenses in the same yearSlight timing differences are difficult to include in a capital expenditure analysis9Copyright  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-SmithDepreciationAustralian tax laws allow two methods of depreciationStraight-line (or prime cost)Diminishing value, based on written-down value of the assetThe method used will affect the after-tax cash flow projectionscontinued10Copyright  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-SmithDepreciationTaxation versus accounting depreciationThe impact on cash flows of a capital expenditure project will result from taxation depreciation, not accounting depreciation11Copyright  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-SmithProfit and loss on disposalProfits or losses on disposal of assets have tax effects and, hence, affect cash flowsUse the book value resulting from taxation deprecation to calculate profit/loss on disposalcontinued12Copyright  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-SmithProfit and loss on disposalProfit on disposal13Copyright  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-SmithProfit and loss on disposalLoss on disposal14Copyright  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-Smith15Copyright  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-SmithProfit and loss on disposalInvestment allowances also affect cash flowsOne-off taxation deductions that businesses receive in the year of purchase of an asset16Copyright  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-SmithInvestment in working capitalWorking capital The excess of current assets over current liabilitiesOften increases as the result of higher balances in accounts receivable or inventory necessary to support a capital investment projectSuch increases are cash outflows and should be included in an analysis or cash flows17Copyright  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-Smith18Copyright  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-SmithAfter-tax cash flows for other capital analysis techniquesPay back periodInitial investment/annual after-tax cash inflowAccounting rate of returnAverage annual profit after-tax from project/initial investment19Copyright  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-SmithRanking investment projectsMost firms have limited resources to invest in potentially profitable projectsNPV and IRR may yield different ranking for alternative proposalsCannot always compare the NPV’s from different projects, as projects may not have the same lifeIRR includes the reinvestment assumption20Copyright  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-Smith21Copyright  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-SmithRanking of investment projectsProfitability index (or excess present value index)Another method for comparing investment proposals22Copyright  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-SmithJustifying investment in advanced technologiesHigh technology projects may yield negative NPVs, even when managers know it will provide a competitive edgeDifficult to quantify strategic impact of investmentsRelevant benefits and costs arising from investing in advanced technologiesStrategic implications for such investmentsIntangible benefits derived from the investment23Copyright  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-Smith24Copyright  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-SmithLimitations of conventional capital expenditure analysisUse of unrealistic status quoDo not assume that the current cash flow situation will be maintained if the project does not aheadCompare the cash flows of the new proposal to the reduction in cash flows that will occur if the project does not go aheadHurdle rates too highTo encourage capital rationing or to hedge against uncertainty continued25Copyright  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-SmithLimitations of conventional capital expenditure analysisTime horizons too shortNeed to include benefits over all future years to prevent bias against unfavourable projectsDifficulty in gaining approval for large projectsCreates incentive for manager to promote small incremental projects rather than requesting large technology projectscontinued26Copyright  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-SmithLimitations of conventional capital expenditure analysisGreater uncertainty about operating cash flowsThe complexities new software and hardware creates uncertaintyInexperience of using new technologies may creates difficulties in estimating cash flowscontinued27Copyright  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-SmithLimitations of conventional capital expenditure analysisExclusion of benefits that are difficult to quantifySynergistic effects of adopting multiple capital expenditure proposalsGreater flexibility in the production processShorter cycle times and reduced lead timesReduction of non-value-added costs28Copyright  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