Bài giảng Managerial Accounting - Chapter 16: Capital Expenditure Decisions

Capital Expenditure DecisionsChapter 16Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Net-Present-Value Method1. Prepare a table showing cash flows for each year,2. Calculate the present value of each cash flow using a discount rate,3. Compute net present value,4. If the net present value (NPV) is zero or positive, accept the investment proposal. Otherwise, reject it.16-*Internal-Rate-of-Return MethodThe internal rate of return is the true economic return earned by the asset over its life.The internal rate of return is computed by finding the discount rate that will cause the net present value of a project to be zero.16-*Internal-Rate-of-Return MethodBlack Co. can purchase a new machine at a cost of $104,320 that will save $20,000 per year in cash operating costs. The machine has a 10-year life.16-*Internal-Rate-of-Return MethodFuture cash flows are the same every year in this example, so we can calculate the internal rate of return as follows: Investment required Net annual cash flows = Present value factor $104, 320 $20,000= 5.21616-*Internal-Rate-of-Return Method $104,320 $20,000= 5.216 The present value factor (5.216) is located on the Table IV in the Appendix. Scan the 10-period row and locate the value 5.216. Look at the top of the column and you find a rate of 14%, which is the internal rate of return.16-*Internal-Rate-of-Return MethodHere’s the proof . . .16-*Comparing the NPV and IRR MethodsNet Present ValueThe cost of capital is used as the actual discount rate.Any project with a negative net present value is rejected.Internal Rate of ReturnThe cost of capital is compared to the internal rate of return on a project.To be acceptable, a project’s rate of return must be greater than the cost of capital.16-*Comparing the NPV and IRR MethodsThe net present value method has the following advantages over the internal rate of return method . . .Easier to use.Easier to adjust for risk.16-*Total-Cost ApproachEach system would last five years. 12 percent hurdle rate for the analysis. MAINFRAME PC _Salvage value old system $ 25,000 $ 25,000Cost of new system (400,000) (300,000) Cost of new software ( 40,000) ( 75,000)Update new system ( 40,000) ( 60,000)Salvage value new system 50,000 30,000================================================Operating costs over 5-year life:Personnel (300,000) (220,000)Maintenance ( 25,000) ( 10,000)Other costs ( 10,000) ( 5,000)Datalink services ( 20,000) ( 20,000)Revenue from time-share 25,000 - 16-*Total-Cost ApproachMAINFRAME ($) Today Year 1 Year 2 Year 3 Year 4 Year 5Acquisition cost computer (400,000)Acquisition cost software ( 40,000)System update ( 40,000)Salvage value 50,000Operating costs (335,000) (335,000) (335,000) (335,000) (335,000) (335,000)Time sharing revenue 20,000 20,000 20,000 20,000 20,000 20,000Total cash flow 440,000 (315,000) (315,000) (355,000) (315,000) (265,000)X Discount factor X 1.000 X .893 X .797 X .712 X .636 X .567Present value (440,000) (281,295) (251,055) (252,760) (200,340) (150,255)SUM OF PRESENT VALUES = ($1,575,705)PERSONAL COMPUTER ($) Today Year 1 Year 2 Year 3 Year 4 Year 5Acquisition cost computer (300,000)Acquisition cost software ( 75,000)System update ( 60,000)Salvage value 50,000Operating costs (235,000) (235,000) (235,000) (235,000) (235,000) (235,000)Time sharing revenue -0- -0- -0- -0- -0- -0- _ Total cash flow 375,000 (235,000) (235,000) (295,000) (235,000) (205,000)X Discount factor X 1.000 X .893 X .797 X .712 X .636 X .567Present value (375,000) (209,855) (187,295) (210,040) (149,460) (116,235)SUM OF PRESENT VALUES = ($1,247,885)16-*Total-Cost ApproachNet cost of purchasing Mainframe system ($1,575,705)Net cost of purchasing Personal Computer system ($1,247,885)Net Present Value of costs ($ 327,820)Mountainview should purchase the personal computer system for a cost savings of $327,820.16-*Incremental-Cost ApproachINCREMENTAL ($) Today Year 1 Year 2 Year 3 Year 4 Year 5Acquisition cost computer (100,000)Acquisition cost software 35,000 System update 20,000Salvage value 20,000Operating costs (100,000) (100,000) (100,000) (100,000) (100,000)Time sharing revenue 20,000 20,000 20,000 20,000 20,000 20,000Total cash flow ( 65,000) ( 80,000) ( 80,000) ( 80,000) ( 80,000) ( 60,000)X Discount factor X 1.000 X .893 X .797 X .712 X .636 X .567Present value ( 65,000) ( 71,440) ( 63,760) ( 42,720) ( 50,880) ( 34,020)SUM OF PRESENT VALUES = ($ 327,820)16-*Total-Incremental Cost ComparisonTotal Cost:Net cost of purchasing Mainframe system ($1,575,705)Net cost of purchasing Personal Computer system ($1,247,885)Net Present Value of costs ($ 327,820)Incremental Cost:Net Present Value of costs ($ 327,820)Different methods, Same results.16-*Managerial Accountant’s RoleManagerial accountants are often asked to predict cash flows related to operating cost savings, additional working capital requirements, and incremental costs and revenues.When cash flow projections are very uncertain, the accountant may . . .increase the hurdle rate,use sensitivity analysis.16-*Income Taxes and Capital BudgetingCash flows from an investment proposal affect the company’s profit and its income tax liability.Income = Revenue - Expenses + Gains - Losses16-*After-Tax Cash FlowsThe tax rate is 40%, so income taxes are$525,000 × 40% = $ 210,000High Country Department StoresIncome StatementFor the Year Ended Jun 30, 2013Revenue $ 1,000,000Expenses (475,000)Income before taxes 525,000Income taxes (210,000) Net Income 315,000Not all expenses require cash outflows. The most common example is depreciation.16-*Modified Accelerated Cost Recovery System (MACRS)Tax depreciation is usually computed using MACRS. Here are the depreciation rate for 3, 5, and 7-year class life assets.16-*Investment in Working CapitalSome investment proposals require additional outlays for working capital such as increases in cash, accounts receivable, and inventory.16-*Ranking Investment ProjectsWe can invest in either of these projects. Use a 10% discount rate to determine the net present value of the cash flows.The total cash flows are the same, but the pattern of the flows is different.16-*Ranking Investment ProjectsLet’s calculate the present value of the cash flows associated with Project A.This project has a positive net present value which means the project’s return is greater than the discount rate.16-*Ranking Investment ProjectsHere is the net present value of the cash flows associated with Project B.Project B has a negative net present value which means the project’s return is less than the discount rate.16-*Alternative Methods for Making Investment DecisionsPayback MethodPaybackperiod Initial investment Annual after-tax cash inflow=Paybackperiod= $20,000 $4,000=5 yearsA company can purchase a machine for $20,000 thatwill provide annual cash inflows of $4,000 for 7 years.16-*Payback: Pro and Con1. Fails to consider the time value of money.2. Does not consider a project’s cash flows beyond the payback period.Provides a tool for roughly screening investments.For some firms, it may be essential that an investment recoup its initial cash outflows as quickly as possible.16-*Accounting-Rate-of-Return MethodThe following formula is used to calculate the accounting rate of return:Accountingrate ofreturn= Average Average incremental incremental expenses, revenues including depreciation & income taxes-Initial investment16-*Accounting-Rate-of-Return MethodMeyers Company wants to install an espresso bar in its restaurant.The espresso bar:Cost $140,000 and has a 10-year life.Will generate incremental revenues of $100,000 and incremental expenses of $80,000 including depreciation.What is the accounting rate of return on the investment project?16-*Accounting-Rate-of-Return MethodThe accounting rate of return method is not recommendedfor a variety of reasons, the most important of which is that it ignores the time value of money.Accountingrate of return $100,000 - $80,000 $140,000 = 14.3%=16-*Estimating Cash Flows:The Role of Activity-Based CostingABC systems generally improve the ability of an analyst to estimate the cash flows associated with a proposed project.16-*Justification of Investments in Advanced Manufacturing SystemsHurdlerates aretoo highTimehorizonsare tooshortBiastowardsincrementalprojectsGreatercash flowuncertaintyBenefitsdifficult toquantify16-*Inflation EffectsNominal DollarsReal dollars16-*