内容参考课件

1、Management Accounting 1MN50493Lecture 7Capital Investment Decisions2Lecture ObjectivesInvestment decision makingPaybackARRNPVDPPIRRMIRRCapital rationingTaxation and investment decisions2Investment Decision Making4Investment Decision MakingDecisions of a long-term natureForm part of the capital budge

2、tProposals generated by:Environmental scanningIn response to an identified problemEvaluation techniques (or combination)Payback periodAccounting rate of returnNet present valueDiscounted paybackInternal Rate of ReturnModified Internal Rate of Return51) Payback PeriodTime taken for cash inflows from

3、a project to equal the cash outflowsDecision rule:Accept all projects with a payback period quicker than the companys target.AdvantagesDisadvantagesSimple to understandCash flows received/paid after payback are ignoredQuick for initial screening of projectsNo account is taken of the time value of mo

4、neyConsiders Risk (very crudely)62) Accounting Rate of ReturnNote: Profit is after depreciationDecision rule:Accept all projects with an ARR above the companys targetAdvantagesDisadvantagesUse of profit consistent with ROCE & EPSNot consistent with wealth maximisationUse of balance sheet values (ass

5、et backing)No account is taken of time value of moneyRelative score is easy to understandPercentage figure may give misleading advice when choosing between alternativesProfits can be manipulated7Example8Example (cont.)93) Net Present ValueThe maximum an investor would pay for a given set of cash flo

6、ws (at his/her cost of capital) compared to the actual amount he/she is being asked to pay.The difference (NPV) represents the change in wealth of the investor as a result of investing in the projectDecision rule: accept all projects with a positive NPVAdvantagesDisadvantagesTakes into account the t

7、ime value of moneyThe need to estimate a cost of capitalGives an absolute measure, allowing for comparison of projectsDifficulty in obtaining all relevant information (cost/benefits)Considers all cash flows of projectsAssumes cash flows occur at annual intervals104) Discounted Payback Period (DPP)Pa

8、yback can be combined with NPVDPP is the time it will take before a projects NPV turns from being negative to positiveDecision rule: accept all projects that payback within their lifetimeAdvantagesDisadvantagesEasy to understandCash flows after the DPP are ignoredFocus on liquidityTakes into account

9、 the time value of moneyTakes into account more of the projects cash flows than non-discounted payback115) Internal Rate of Return (IRR)IRR A cost of capital at which the NPV of a project would be 0.Two methods to estimate IRR125) IRR (cont.)135) IRR (cont.)Decision rule: Accept all projects with an

10、 IRR above the cost of capitalAdvantagesDisadvantagesTakes into account the time value of moneyMay conflict with NPV decisionRepresents a breakeven point so does not need an exact cost of capitalAssumes cash reinvested at IRRConsiders all cash flows of projects14Example15Example (cont.)16Example (co

11、nt.)17Mutually Exclusive ProjectsAccepting one project, means rejecting anotherNPV & IRR conflict if projects have different durations or initial outlays18Example19Example (cont.)206) Modified IRR e the disadvantage of IRRMultiple rates of returnAssumption that cash flows are reinvested at the Cost

12、of Capital not IRRProduces only one rate and assumes reinvestment at Cost of CapitalNote: MIRR is still inferior to NPV for choosing between mutually exclusive projects21ExampleUsing the information for Parkway Diner, calculate MIRR.227) Post Completion AuditVery important though not widely implemen

13、tedCapital projects evaluated and chosenBased on estimates of revenues and costsRank projects to get highest profits and returnsPCA does not reverse decision though can ensure:Estimated revenues are achievedCost/time overruns do not occurFailing projects are identified and can be abandoned if approp

14、riate23PCAAdvantagesDisadvantagesMotivates/rewards managersUncontrollable factorsHighlights failing projects that should be discontinuedCost/revenue separationImproves future forecastingCost and timeMakes forecasting more realisticCreates a risk-averse attitudeDelay, as strategic projects may take y

15、ears to provide benefits24Capital Rationing25Capital Rationing资本限额Insufficient capital to invest in NPV+ projectsAssumptions underlying capital rationingProjects cannot be postponedObjective: maximise NPV from available investment capitalWhen ranking single period divisible projects Use a profitabil

16、ity index (PI) is required:PI = (NPV/Capital Invested)i.e. Can therefore rank projectsSingle and Multi-period analysisAlternatively, PI=PV/Capital InvestedNB. NPV/Capital Invested = PV/Capital Invested -126i) Example Single Period27Example (cont.) - Answer28Example Answer (cont.)29ii) Example Multi-

17、period30Example (cont.) - Answer31Capital Rationing - SummaryTaxation and Investment Decisions33Taxation legislation specifies that net cash inflows of companies are subject to taxation, and capital allowances (writing down allowances) are available on capital expenditure.ExampleI0 = 100,000 cash in

18、flows = 50,000 for four yearsEstimated sale proceeds = Tax WDV at end of year 4Capital allowances = 25% on a reducing balance basisCorporate tax rate = 35%Required: Calculate the annual incremental cash flow after tax. 34STEP 2 Calculate incremental taxes arising from the project:Year Year Year Year

19、 1 2 3 4 Incremental Profits 50,000 50,000 50,000 50,000WDAs 25,000 18,750 14,063 10,547Taxable profits 25,000 31,250 35,937 39,453Taxes at 35% 8,750 10,937 12,578 13,809STEP 1 Calculate capital allowances (WDAs)Year Annual WDAs WDV 0 0 100,0001 25,000 (25% 100,000) 75,0002 18,750 (25% 75,000) 56,2503 14,063 (25% 56,250) 42,1874 10,547 (25% 42,187) 31,640Will be dealt with in Step 335STEP 3 Tax effect of balancing allowanceIf the estimated sale proceeds exceeded the WDV (say, 45,000) there would also be an additional balancing charge of 13,360 (