Gray zone watching shoot author(s) frazer ward sou

Gray Zone: Watching "Shoot"
Author(s): Frazer Ward
Source: October , Winter, 2001, Vol. 95 (Winter, 2001), pp.
114-130
Published by: The MIT Press
Stable URL: https://www.jstor.org/stable/779202
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Gray Zone: Watching Shoot
FRAZER WARD
I wasn't the artist who shot himself and I am
not the artist that pushes museums down.
-Chris Burden, 1996
Truth and consequences: the public as ethical realm
Chris Burden's description of his most famous (or infamous)
performance,
Shoot (November 19, 1971), consists of three simple sentences:
At 7:45 p.m. I was shot in the left arm by a friend. The bullet
was a copper
jacket 22 long rifle. My friend was standing about fifteen feet
from me.1
The bullet was intended to graze Burden's arm, but caused a
more serious

wound.2 The performance took place after hours in a gallery
space for an invited
audience of about ten people; it is documented by the
description and a black-
and-white photograph that shows Burden with his back against
a wall and the
marksman with rifle raised and his back to the viewer (so that
the photographer's
view was close to that of the marksman, though not exactly the
same). The photo-
graph is blurry, as if the photographer, understandably, had
winced. Another
photograph occasionally appears, which is an apparently
candid, head-to-knee
image of Burden walking from right to left, with his left arm in
the foreground,
held slightly away from his body, clearly showing the entry and
exit wounds in his
upper arm, with a line of blood running down from the entry
wound to below his
elbow.
As Shoot makes clear, Burden's performance work reached a
high pitch of
physical violence early in his career, and there has been a
tendency, subsequently,
1. "Chris Burden: Original Texts 1971-1995," Chris Burden
(Paris: Blocnotes, 1995), n.p.
2. "In Shoot I was supposed to have a grazed wound. We didn't
even have any Band-aids"
(Willoughby Sharp and Liza Bear, "Chris Burden: The Church
of Human Energy, An Interview by
Willoughby Sharp and Liza Bear," Avalanche 8 [Summer/Fall
1973], p. 54).

OCTOBER 95, Winter 2001, pp. 115-130. ? 2001 October
Magazine, Ltd. and Massachusetts Institute of Technology.
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Shoot. 1971. (Photo courtesy Chris Burden.)
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116 OCTOBER
simply to assign it to a pathological state. Certainly, over the
years since, critics
have tried to fit Burden into categories of subjectivity, as if the
right match
between type of person and performance would explain the
work. Among other
things, Burden has been described as a masochist; an avant-
garde novitiate; a
social therapist; an existential populist; a hero; the alter ego of
the biblical
Samson; a helpless, passive victim; a heroic victim; an
anthropologist; someone
inclined toward the scientist, engineer, inventor, tinkerer; a

victim-by-request; the
hero of an impossible quest (a modern Don Quixote); a
voluntary scapegoat; and
a survivalist.3 The very proliferation of these categories
indicates the failure of the
attempt to explain Shoot in terms of what kind of person would
do such a thing.
That failure leaves the work unexplained in terms able to be
appropriated by the
mass media, and the enigmatic status that results may be one of
the reasons that
Burden remains closely identified with Shoot. By mid-1973,
almost two years after
the performance, it had become fodder for sensational
journalism. In an inter-
view at that time in Avalanche, Burden commented on the way
his public was being
shifted away from "art people":
After that little number in Esquire, this guy called from Texas,
I'd hear
the bleeps on the phone: "Bleep. Hi! This is Don Steel on
WKEP in
Texas, are you Chris Burden?" "Yeah." "Are you the artist?"
"Yeah."
"What are you going to do next?"4
Exposed to tabloid publicity that most artists never have to
deal with, Burden was
saddled with a public identity as "the artist who shot himself."
The attempt to explain what kind of person would do such a
thing is in any
case misguided. Shoot was constitutively a collaborative event;
Burden did not
shoot himself, he was shot by a friend, and the audience
gathered to see it hap-

pen. When this is emphasized, different questions emerge. How
could someone
be persuaded to shoot his friend? Why were audience members
prepared to let it
3. The first reference is to Kathy O'Dell, Contract with the
Skin: Masochism, Performance Art and the
1970s (Minneapolis: University of Minnesota Press, 1998).
More convincingly than is done in the other
accounts listed here, O'Dell elaborates relations between a
"masochistic contract" and historical
moments of social uncertainty and upheaval. The idea of this
contract is grounded largely in Gilles
Deleuze's interpretation of masochism in Coldness and Cruelty,
trans. Jean McNeil (New York: Zone
Books, 1989). The other descriptions are given by: Peter
Plagens, "He Got Shot-For His Art," New York
Times, September 2, 1973, D3; Donald Kuspit, "Man For and
Against Machine," in Chris Burden: Beyond
the Limits, pp. 59, 63, 71, 73; Peter Noever, "Assault on Art,"
in Chris Burden: Beyond the Limits, p. 11;
Johannes Lothar Schr6der, "Science, Heat and Time:
Minimalism and Body Art in the Work of Chris
Burden," in Chris Burden: Beyond the Limits, pp. 197, 201;
Paul Schimmel, "Other Worlds: Interview with
Chris Burden," p. 34; Frank Perrin, "An Administration of
Extreme Urgency," in Chris Burden (Paris:
Blocnotes, 1995), n.p.; Stuart Morgan, "Survival Kit," Frieze
28 (May 1996), p. 54.
4. Burden in Sharp and Bi6ar, "The Church of Human Energy,"
p. 58.
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Gray Zone: Watching Shoot 117
happen? Questions like these suggest that what remains
compelling in Shoot is not
its physical violence, but its violently negative inference of an
ideal public realm.
Shoot is characteristic of Burden's early performance work in
that its combi-
nation of physical violence and passivity (Burden's and the
audience's) held out
the possibility of the public as a realm of, or opportunity for,
judgment and deci-
sion, but then largely forestalled that possibility.5 The very
violence of Shoot seems
to have called out for intervention on the part of collaborators
or audience mem-
bers. It doesn't seem too far-fetched to imagine the marksman
calling it off at the
last moment, or someone in the audience trying to talk
everyone out of it. Yet
once it was in train, some combination of the expectation of a
specialist public
(and Burden's manipulation of that), prurient fascination, an
antimoralistic, anti-
authoritarian historical milieu, even the brevity of the work,
prevented any such
intervention. As a result, Shoot, however tendentiously,
negatively or repellently,
limned the public as an arena of responsibility, of dilemma and
decision-as an
ethical realm. From this viewpoint, Shoot remains important as

a signal example,
among a body of more or less violent performances of the
1960s and '70s, the
implications of which, in terms of their having posed ethical
questions as they con-
stituted their own publics, have yet to be fully considered.6 In
the case of Burden,
at least, this approach shifts the discourse away from endless
refinements in the
stereotyping of artistic subjectivity.
After Minimalism: spectacle, participation, and passivity
The violence of Shoot is often, perhaps intuitively, taken to be
connected with an
emphatic artistic presence.7 Of course, Shoot draws some of its
"authority" from
Burden's physical experience; but this can be overemphasize d
at the expense of
the roles of marksman, photographer, and audience members.
To read Burden's
presence in Shoot as self-evident is to allow the apparent
extremity of the perfor-
mance to supercede the ways in which his presence was
actually complicated and
qualified. Without examining the mediation of presence in
Shoot, there may be a
tendency not to see the ethical questions the work poses. These
questions are tied
5. This can be seen as a negative reference to that realm of
public debate and reasoning described
byJfirgen Habermas as the public sphere.
6. Performances by other artists, including Marina Abramovic,
Vito Acconci, Valie Export, Gina
Pane, Yoko Ono, and Barbara Smith, may productively be

examined in this framework.
7. If we recall Rosalind Krauss's critical account of modernist
relations between medium and sub-
jectivity, in which everything about a painting, for instance,
was taken to express the interior life of the
artist, then the apparent substitution of the artist's body for
another medium might seem to conform
to Mary Kelly's argument that in performance art we see the
return of a (modernist) legitimating artis-
tic presence, by other means. See Krauss, Passages in Modern
Sculpture (Cambridge: MIT Press, 1981),
71, and Kelly, "Re-Viewing Modernist Criticism," in Art after
Modernism: Rethinking Representation, ed.
Brian Wallis (New York: New Museum of Contemporary Art,
1984), pp. 94-95.
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118 OCTOBER
to a critical engagement with Minimalism, at the same time that
they connect the
work to broader than strictly art-historical or art-world
concerns; the Vietnam War,
and its mass-media representations, provide one unavoidable
context for the vio-
lence of Shoot. So in broad strokes, there is a double context
(at least) for Shoot:
one element is Minimalism; the bloodier element is the
spectacle of the war.

Shoot's relation to Minimalism is implicit in Burden's emphasis
on the experi-
ence of being shot as "interesting":
Willoughby Sharp: So it doesn't much matter to you whether
it's a nick or
it goes through your arm?
Chris Burden: No. It's the idea of being shot at to be hit.
WS: Mmmmm. Why is that interesting?
CB: Well, it's something to experience. How do you know what
it feels
like to be shot if you don't experience it? It seems interesting
enough to be
worth doing.
WS: Most people don't want to be shot.
CB: Yeah, but everybody watches it on TV every day. America
is the big
shoot-out country. About fifty per cent of American folklore is
about
people getting shot.8
Burden's account resonates with Donald Judd's single
requirement that a work of
art be interesting, and extends it in relation to media culture.
Shoot also translated
Judd's Minimal order, in a manner consistent with other
postminimalist turns away
from the art object, so that it was the experience involved in
the production of the
art (in this case, the performance) that needed to be interesting,
instead of any
object itself.
It was in part the stolid simplicity of Minimalism's objects (in

Robert Morris'
term, their quality as "gestalts") that deflected viewers'
attention onto their own
experience of art and its contexts. Burden's "clinical"9
passivity in the face of the
particular experience of being shot at appears as an embodied
extension or exag-
geration of the passivity of Minimalist objects. Yet the
simultaneously dangerous,
spectacular aspect of that experience-far from the highly
refined experiences
proffered by Minimalist objects-also provided for self-
reflection on the part of
viewers, at least potentially, along the lines of whether or not
they should have
participated. In this case, Shoot offered a comment on the
bloodlessness of
Minimalism's phenomenological investigations, introducing
instead questions of
consequences, and both artists' and viewers' participation and
responsibility. It
explicitly involved not only viewers' bodies but the artist's as
well. In relation to
8. Sharp and B&ar, "The Church of Human Energy," p. 54,
emphasis added.
9. Jon Bewley, "Chris Burden in Conversation with Jon
Bewley," in Talking Art 1, ed. Adrian Searle
(London: Institute of Contemporary Arts, 1993), p. 20.
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Minimalist versions of repetition, while Shoot was in principle
repeatable-each
bullet in the gun was a potential instance-this potential in fact
marked a further
departure from Minimalism, in that the differences between one
experience and
the next must be bound to more than the viewer's physical
orientation in space
(the experience and effect of any repetition, for instance, would
be affected by
chance).o10 So Shoot dealt with terms derived from or
inflected by Minimalism, cen-
trally interest and experience and, more tangentially,
repetition. However, none
of this quite answers the question of why Burden (or for that
matter anyone else)
would choose to engage with or critique Minimalism by being
shot. Consciously, at
least, outside the realm of fantasy, to echo Willoughby Sharp' s
dry remark, most
people still do not want to be shot.
Twenty years after the interview in Avalanche, Burden referred
again to tele-
vision and films ("actually being shot is quite different"), and
continued:
I think everyone subconsciously has thought about what it's
like to be
shot. Being shot, at least in America, is as American as apple
pie, it's
sort of an American tradition almost. To do it in this clinical

way, to do
something that most people would go out of their way to avoid,
to turn
around and face the monster and say, "Well, let's find out what
it's
about," I think that touches on some cord, that's why the piece
works,
that's why a man twenty years later is calling me up with a
crank call
from Tennessee and is irate about it.11
Repeating the gist of this in 1996, Burden added, "all the
audience cannot help
but place themselves into my shoes."12 Now, Burden is
American, and, clearly, so is
his "everyone." The body and the subjectivity in question in
Shoot have a national
context that may have fed a temptation to see (or look for) the
work as a direct
commentary on the Vietnam War. As a result, we get Burden as
heroic victim, as a
kind of martyr, whose self-victimization mimics, in protest, the
brutality of the war.
Such a reading, however, not only repeats the colonial
asymmetry of broader his-
torical circumstances-presenting Shoot as a homegrown version
of Buddhist
self-immolations, as seen on television, perhaps-but ignores the
art-historical and
10. In 1973 Burden allowed that Shoot might physically be
repeated, but that to do so would be too
theatrical: "Getting shot is something you could do for a circus
over and over and over." But he has dis-
tanced himself from that potential, saying, "The unknown's
gone. I mean, there's no point in ever get-

ting shot again" ("The Church of Human Energy," pp. 58, 61).
Twenty years later he again distin-
guished the work from theater by his desire not to repeat it: "I
never saw myself as an actor. I'd never
stand in front of an audience and do Shoot over again, for
example" (Sharp and B&ar, "Chris Burden in
conversation with Jon Bewley," p. 23).
11. Ibid., pp.20-21.
12. Jose Antonio Sarmiento, "Chris Burden: Interview with
Jose Antonio Sarmiento; 'Hacer arte es
verdaderamenta una actividad subversiva,'" Sin Titulo 3
(September 1996), p. 56.
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120 OCTOBER
art-institutional issues to which Burden's performances were
also tied. With regard
to the Vietnam War, Burden himself was sensibly careful not to
equate his own
(nonetheless real) wound with the wounds of soldiers, as Peter
Plagens recounted
in 1973:
I asked Burden about that-comparing his bullet wound to a real
one,
suffered by a Vietnam vet or a street-gang member. "Isn't it
small pota-
toes?" I said. "Yes," he said.13

Burden's wound was "small potatoes" in part because its
consequences were differ-
ent. The shot that caused it was not fired in anger but in
collaboration, and if
Burden's death was unlikely to have occurred, it was
nonetheless conceivable
(Burden or his friend the marksman might have slipped,
panicked, etc.). But as
the sarcastic title of Plagens's newspaper commentary puts it,
"He Got Shot-For
His Art." No national interest was affected by this danger or
this wound, and no
mission was compromised, no troop (or gang) was endangered,
let down, or dis-
honored. To the extent that it was a life-and-death situation, if
it is possible to
speak relatively, little was at stake. If Burden had been killed,
or more seriously
wounded, he would not have become a hero of the antiwar
movement (or a mar-
tyr to art), but would have been subject to more intense
disapproval and ridicule.
His friend the marksman, and the invited audience, would have
found themselves
with even more serious ethical questions to answer, let alone
evidentiary and legal
ones.
Us and ours: the collective and the media
Even if the bullet had missed altogether, Shoot's invocation of
gunshot
wounds and death, in the historical moment in which it
occurred, has to be con-

sidered in relation to a backdrop of representations of violence,
and particularly
representations of the Vietnam War. Hence, for instance,
Plagens's discomfort
with the work, which might reflect the suspicion that the war
provided a too-easy
or ethically slack context for the work, lending its one shot too
much import.
Here we are returned to questions of consequence and
responsibility. If the iden-
tifications that Shoot attracted emerged from a specifically
American cultural
subconscious, that realm of fantasy and projection must also be
seen in relation to
the same historical context. For Burden, ostensibly, audience
members could (or
must) "place themselves into my shoes," because, as far as it
was relevant to Shoot,
the public-"everyone"-was constituted in relation to a history
of representa-
13. Plagens, "He Got Shot-For His Art," D3. Plagens
continued: "But-so it came to me later-so
is all art: yours, mine, Burden's or Wegman's" (work by
William Wegman was also discussed in the text).
Conceivably, it might be possible to argue that, as far as its
relation to its historical context goes,
enabling this recognition was the point of Shoot.
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tions of violence. But that history (that "tradition" and
"folklore") was bound to
the mass media and therefore to programming (repeats, reruns,
etc.), which
means that it was a history without sequence, a swirl of
westerns and science fic-
tion, war and noir and news, such that six-guns, lasers, and
napalm might come to
share a generic quality. And "everyone" might come to share
that, too. In relation
to Shoot, "everyone" (us) is the collective that forms around
the violent event. As
such, it must be suspect. For "our" interest in, or fascination
with, representations
of violence belongs to-or is assigned to-an imagined, statistical
community of
moviegoers, television watchers, and tabloid readers, defined
by ticket sales, rat-
ings points, and circulation figures.
Burden's own accounts suggest that his experience was defined
by distinc-
tion from this society of the statistical.14 Crucially, however,
his own experience
must have emerged from it as well; Burden is one of us, too,
and if "us" and "we"
and "our" are under the gun, if "everyone" is, then "I" and "my"
must be, as well.
So the identifications arcing toward Shoot, especially in its
photographic form,
incorporated or reincorporated it into an amorphous cultural
field. This is
another way of thinking about Burden's "facing the monster,"

in which the mon-
ster is not necessarily the bullet and being shot, but the
problem of distinguishing
oneself from the shapeless entity-in this case a national,
cultural entity-that
nonetheless shapes that self. In this context, the equation that
Shoot sets up,
between self-distinction and self-effacement, becomes the
ground for a very lit-
eral, perhaps nihilistic, gesture of negation.
The crucial aspect of representations of the Vietnam War, as
far as their
relevance to Shoot is concerned, is that their meaning was
contested. As much as
gun violence is part of American folklore, so is the idea that
television images
from Vietnam helped to galvanize the antiwar movement,
specifically by creating a
constituency among middle-class voters not expected, by the
government, at least,
to have opposed the war. It can be described as folklore
because of the way it con-
denses elements of the historical situation. Of course,
conditions for the growth
of the antiwar movement were more complex. Like Shoot,
images of the war in and
of themselves did not necessarily establish anything more than
the fact that the
war was happening and that it was brutal. But there had been
active opposition to
the war for years before television images took their much-
vaunted effect, which is
to say that other interpretations of those images were already
available than those

14. Here I refer to Mark Seltzer's account of a public sphere
that turns pathological as the self is
experienced as a typicality within. Seltzer quotes Gilles
Deleuze and F'lix Guattari to the effect that
there is "always something statistical in our loves, and
something belonging to the laws of large num-
bers." See "Serial Killers (II): The Pathological Public Sphere,"
Critical Inquiry 22, no.1 (Autumn 1995),
p. 124. Burden's work may represent an attempt to resist seeing
the self, in its most intimate connec-
tions, in this way.
15. As Susan Sontag argues, "A photograph that brings news of
some unsuspected zone of misery
cannot make a dent in public opinion unless there is an
appropriate context of feeling and attitude,"
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122 OCTOBER
offered by the government.15 And at a certain point, popular,
mainstream media
figures began to take editorial positions against the war.16 This
is the merest
sketch, but it is enough to make the point that within and
between segments of
the government, the media, and the population, images of the
war in Vietnam
were subject to radically different interpretations and put to

very different purposes.
Such contests mean that if the public was constituted around
representations of
violence, in the period in which Shoot was performed, then
"everyone" was often
bitterly fragmented.
One context for Shoot, then, was a public realm, whether
empirical or imag-
ined, that was shapeless and/or fragmented: a realm that
provided no stable
ethical vantage point. Yet Burden has called his early
performances "very private
acts."17 On the one hand, his definition of private seems to be
quantitative: "often
there were only two or three people there to see them, or maybe
just the people
who were there helping me."18 On the other hand, he has also
spoken of the audi-
ence, however small, as having been a crucial catalyst in the
execution of the
works: "I'd set it up by telling a bunch of people, and that
would make it hap-
pen."19 These private acts, that is, depended in part for their
realization on their
informal circulation in the form of invitation and expectation,
even before their
documentation (and before they were picked up by the mass
media). So their pri-
vate character cannot be separated easily, if at all, from a
public orientation.20
Further, this interdependence of private and public was
implicitly ethical: Burden
established an obligation, or at least an expectation, that he
would do something,
for or with a group of people. He would therefore have broken
his word, had he

not gone through with it. The somewhat fragile formality of
this obligation means
that the affective dimension of the work was to some extent
derived, before the
fact, from its virtual public existence, and was not simply a
private matter.
Intuitively or otherwise, Burden cannily manipulated the roles
that shared interest
and mutual obligation play in the formation of a public.
Ideally, a public is to be
and, "Americans did have access to photographs of the
suffering of the Vietnamese (many of which
came from military sources and were taken with quite a
different use in mind) because journalists felt
backed in their efforts to obtain those photographs, the event
having been defined by a significant num-
ber of people as a savage colonialist war" (On Photography
[New York: Anchor Books, 1990], pp. 17-18).
16. The newsreader Walter Cronkite is the signal example.
17. "Chris Burden in conversation with Jon Bewley," p. 22.
18. Jim Moisan, "Border Crossing: Interview with Chris
Burden," High Performance 2, no. 1 (March
1979), p. 9.
19. Ibid.
20. This may recall, if at some distance, Jfirgen Habermas's
account of the ideal type of bourgeois
subjectivity as it emerged from the bourgeois family (nowhere,
perhaps, is Habermas's idealism clearer,
however accurate the insight into the structure of subjectivity):
"Subjectivity, as the innermost core of
the private, was always already oriented to an audience"
(Habermas, The Structural Transfor mation of the
Public Sphere, trans. Thomas Burger with Frederick Lawrence
[Cambridge: MIT Press, 1989], p. 49).

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distinguished from an audience, which would simply be the
people who were
there, but the necessary passivity of the people who were
present to watch Shoot
(not including the marksman), casts that distinction in doubt.
It's as though Shoot
required a public, in the sense of an interested, participant
group, but not too
much of one.
Innocent bystanders
Robin White: Well, what kinds of insights do you think you
have gained
from doing these-these things, you know, these endurance
tests?
These risk situations? These isolations?
Chris Burden: What kind of insights?21
Referring to the dispassionate nature of his work's
documentation, Burden
has said that "there would be no explanation as to why these
things had hap-
pened, or what it meant."22 He has nevertheless offered a

series of consistent if
partial explanations of Shoot over the years. These may suggest
directions in which
to begin to interpret the work.
Burden's claim is that Shoot functions as a kind of lightning
rod for
inescapable identifications ("all the audience cannot help but
place themselves into
my shoes") that arc from a specifically American cultural
"subconscious." Burden's
conception of his performances as private was quantifi able
("often there were
only two or three people there to see them"), and his version of
the public
("everyone," "all the audience") risked the level of generality
of political sloga-
neering ("the American people," etc.), the effect of which is to
efface differences.
The subconscious that his work calls upon operates in relation
to "tradition" and
"folklore," but these are tied to mass media, and hence to the
generic forms of
gun violence, fictional or otherwise; westerns, war movies,
crime genres, and also,
in 1971, during the Vietnam War, the television news. (In this
context, the news,
of course, remains the most banal and insidious provider of
"atrocity exhibitions."23)
Burden seems to have set in play an unstable relation between a
too-empirical ver-
sion of what is private and a too-general version of the public.
Yet his concern with
21. Robin White, "Chris Burden: Interview with Robin White,"
View 1, no. 8 (January 1979), pp. 6-7.

22. "Chris Burden in Conversation with Jon Bewley," p. 17.
23. The phrase is the novelist J. G. Ballard's, from The Atrocity
Exhibition (San Francisco: Re/Search,
1990). He writes, "As you and I know, the act of intercourse is
now always a model for something else,"
p. 77. Quoting this, Mark Seltzer has added, "The body, one
might say, always becomes …
Copyright © 2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Chapter 14
14-1
Decision Making: Relevant Costs and Benefits
1

1
Chapter 14: Decision Making: Relevant Costs and Benefits
Learning Objective 14-1 – Describe seven steps in the decision-
making process and the managerial accountant’s role in that
process.
14-2
Learning Objective 14-1. Describe seven steps in the decision-
making process and the managerial accountant’s role in that
process.
The Managerial Accountant’s Role
in Decision Making
Designs and implements
accounting information
system
Cross-functional
management teams
who make
production, marketing,
and finance decisions
Make substantive

economic decisions
affecting operations
Managerial
Accountant
14-3
2
2
The accountant is increasingly a part of the upper-management
decision-making team.
Management accountants are called to deliver relevant
information to the team from the accounting information
system.
These teams then make decisions regarding production,
marketing, and financing affecting their organization.
The management accountant is considered a business advisor in
many organizations. (LO 14-1)
The Decision-Making Process (1 of 4)
1. Clarify the Decision Problem
2. Specify the Criterion

3. Identify the Alternatives
4. Develop a Decision Model
5. Collect the Data
6. Select an alternative
Quantitative
Analysis
7. Evaluate decision
14-4
3
3
Seven steps generally characterize a typical decision-making
process.
Defining the problem, determining the objectives of the
decision, identifying alternative courses of action, determining
what information is relevant, collecting information to support
the decision, then selecting the appropriate alternative. (LO 14-
1)
Learning Objective 14-2 – Explain the relationship between
quantitative and qualitative analyses in decision making.
14-5

Learning Objective 14-2. Explain the relationship between
quantitative and qualitative analyses in decision making.
5. Collect the Data
Primarily the
responsibility of the
managerial
accountant.
Information should be:
1. Relevant
2. Accurate
3. Timely
14-6

4
4
Accounting data is typically kept in quantitative measures, and,
is important in the decision–making process.
Managers must use their skills, their judgment and their ethics
to make difficult decisions.
While involved in all stages of the decision-making process, the
managerial accountant’s primary role is to provide quantitative
data and analysis that are relevant, accurate, and timely to the
decision being made. (LO 14-2)
5. Collect the Data
Relevant
Pertinent to a
decision problem.
Accurate
Information must

be precise.
Timely
Available in time
for a decision
14-7
4
4
A managerial accountant might ask, “What sort of information
should the accountant gather?”
Information that is useful to a decision has some common
characteristics. The information should be relevant, timely, and
accurate. Relevant information means that only the information
required to make the decision is presented. Information must
also be accurate in order to be useful. The accuracy of the
information is sometimes sacrificed in order to be timely.
Information that is delivered after a decision has been made is
of little use. If accountants had unlimited time, the information
could be extremely accurate. Accuracy suffers as the time
period shortens.
The management accountant’s job is to determine what
information is relevant and provide accurate and timely data
keeping a proper balance of accuracy and timeliness. (LO 14-2)

5. Collect the Data
Qualitative
Considerations
14-8
7
7
Qualitative characteristics are the factors in a decision problem
that cannot be expressed effectively in numerical terms.
Sometimes, a decision can be made that goes against the
quantitative analysis, because the effect on the company, their
employees, or their customers would be negative. (LO 14-2)

Learning Objective 14-3 – List and explain two criteria that
must be satisfied by relevant information.
14-9
Learning Objective 14-3. List and explain two criteria that must
be satisfied by relevant information.
Relevant Information
Information is relevant to a decision
problem when . . .
It has a bearing on the future
It differs among competing alternatives
14-10

8
Relevance has certain characteristics also. Relevant information
is future oriented. To demonstrate this characteristic, you
cannot make a decision on what to have for breakfast yesterday.
Why? Because the decision has already been made! You have
either already eaten or skipped yesterday’s breakfast. You can
make a decision on what to have for breakfast tomorrow, in the
future. Relevant information differs between the alternatives.
This makes a difference in the decision. If one item costs $100,
and the second item costs $100, there is no difference in the
cost. In other words, it is not relevant to the decision.
If the second item cost $115, there would be a difference, so it
would be relevant to the decision.
Relevant information makes a difference in a decision. (LO 14-
3)
Learning Objective 14-4 – Identify relevant costs and benefits,
giving proper treatment to sunk costs, opportunity costs, and
unit costs.
14-11
Learning Objective 14-4. Identify relevant costs and benefits,

giving proper treatment to sunk costs, opportunity costs, and
unit costs.
Identifying Relevant Costs and Benefits
Sunk Costs
Costs that have already been incurred. They do not affect any
future cost and cannot be changed by any current or future
action.
Sunk costs are irrelevant to decisions.
14-12
9
11
Sunk costs are costs that have been incurred in the past, and are
not relevant to the future, and not relevant to a future decision.
A decision has already been made, in the past, and that specific
decision cannot be changed. A new decision can be made
regarding the past decision, but, that is a new decision. Sunk
costs cannot be changed.

Sunk costs are never relevant to a future decision. (LO 14-4)
Relevant Costs (1 of 4)
Worldwide Airways is thinking about replacing a three year old
loader with a new, more efficient loader.
14-13
11
17
An example might help clarify relevant costs.
In this example, a business is considering the replacement of a
loading machine. (LO 14-4)
If we keep the old loader, we will have depreciation

costs of $25,000. If we replace the old loader,
we will write-off the $25,000 when sold. There is
no difference in the cost, so it is not relevant.
The $5,000 proceeds will only be realized if we
replace the old loader. This amount is relevant.
We will only have depreciation on the new loader
if we replace the old loader. This cost is relevant.
14-14
12
18
Depreciation of the old loader is not relevant. The cost of the
old loader was incurred in the past, and cannot be changed.
If we decide to replace the old loader, we can sell it for $5,000.
This is relevant to the decision because we will only sell the
loader in the future, if the decision to replace the machine is
made. The $5,000 is relevant to the decision to replace the
loader. We will only have depreciation on the new machine if
we replace it. The depreciation cost of the new loader is
relevant. (LO 14-4)

The difference in operating costs is relevant
to the immediate decision.
14-15
If we buy the new loader, there will be differences between the
operating costs of the current loader and the new one.
The differences in operating costs is relevant to the decision to
replace the old loader. (LO 14-4)
Here is an analysis that includes only
relevant costs:
14-16

30
37
The final analysis of the relevant costs of purchasing the new
loader shows that the new loader would have a positive effect of
$25,000 to the business.
The decision to purchase a new loader is appropriate. (LO 14-4)
Opportunity Costs
The potential benefit given up when the choice of one action
precludes a different action.
People tend to overlook or underestimate the importance of
opportunity costs.
14-17
An opportunity cost is the potential benefit given up when the
choice of one action precludes you from choosing a different
action. Although people tend to overlook or underestimate the
importance of opportunity costs, they are just as important as
out-of-pocket costs in evaluating decision alternatives. (LO 14-
4)
Learning Objective 14-5 – Prepare analyses of various special
decisions, properly identifying the relevant costs and benefits.
14-18

Learning Objective 14-5. Prepare analyses of various special
decisions, properly identifying the relevant costs and benefits.
Accept or Reject a Special Order (1 of 6)
A travel agency offers Worldwide Airways $150,000 for a
round-trip flight from Hawaii to Japan on a jumbo jet.
Worldwide usually gets $250,000 in revenue from this flight.
The airline is not currently planning to add any new routes and
has two planes that are idle and could be used to meet the needs
of the agency.
The next screen shows cost data developed by managerial
accountants at Worldwide.
14-19
59

71
A travel agency e-mails us. They want to charter one of our
aircraft for a round trip flight from Japan to Hawaii. We have
two airplanes that could potentially be used to fly this trip. The
managerial accountant prepared some information to help the
team make the decision whether or not to accept this offer. (LO
14-5)
Worldwide will save $5,000 in reservation
and ticketing costs if the charter is accepted.
14-20
Normally, we would earn revenues of $280,000 and incur
expenses of $190,000 on a trip such as this.
However, we would not have to provide ticketing and
reservation services and would save $5,000 in these costs. (LO
14-5)

Since the charter will contribute to fixed costs and
Worldwide has idle capacity, the company should
accept the flight.
14-21
Since we have two airplanes that are not being used, we only
need to consider our variable costs of making the trip.
We would also save the ticketing costs, reducing our variable
costs by $5,000.
Even though we would normally receive $250,000 for a trip
such as this, we should accept the offer.
The trip would contribute to paying our fixed costs, or, if our
fixed costs are already paid, it would contribute this amount
directly to profit.
Worldwide should accept this offer. (LO 14-5)
What if Worldwide had no excess capacity?
If Worldwide adds the charter, it will have to cut its least
profitable route (that currently contributes $80,000 to fixed
costs and profits).
Should Worldwide still accept the charter?
14-22

What should we do if all of our airplanes are busy and we would
have to pull our airplane from a regular route? (LO 14-5)
Worldwide has no excess capacity, so it should reject the
special charter.
14-23
Since we would not earn the revenues from our regular route,
we would have to charge for the lost revenue of the route that
was not taken, a lost opportunity.
The total cost to us exceeds the amount of the offer so we
should reject the special offer. (LO 14-5)
With excess capacity…
Relevant costs will usually be the variable costs associated with
the special order.
Without excess capacity…
Same as above but opportunity cost of using the firm’s facilities
for the special order are also relevant.
14-24

The decision to accept or reject a special offer can be summed
up like this.
If we do have excess capacity, the relevant costs will usually be
the variable costs.
If we do not have excess capacity, we would have to add the
opportunity cost of using our facilities. (LO 14-5)
Outsource a Product or Service (1 of 4)
A decision concerning whether an item should be produced
internally or purchased from an outside supplier is often called
a “make or buy” decision.
Let’s look at another decision faced by the management of
Worldwide Airways.
14-25
49

61
Sometimes the decision is whether we should produce a product,
or whether we should have someone else produce that product.
This is called a make buy decision. (LO 14-5)
An Atlanta bakery has offered to supply the in-flight desserts
for 21¢ each.
Here are Worldwide’s current cost for desserts:
14-26
50
62

We currently make our own desserts that are served on flights.
Our cost summary is shown here. (LO 14-5)
Not all of the allocated fixed costs will be saved
if Worldwide purchases from the outside bakery.
14-27
Our variable costs will remain in the analysis, but some of our
allocated fixed costs will not be relevant to this decision.
We will incur somewhat less in supervisor salaries, but will still
have some since someone needs to make sure the desserts are
delivered and loaded properly.
Our depreciation will not change under either decision, so that
cost is not relevant.
Our relevant costs are 15 cents per dessert. (LO 14-5)
If Worldwide purchases the dessert for 21¢, it will only save
15¢ so Worldwide will have a loss of 6¢ per dessert purchased.
14-28

If we bought from the outside source, our cost would be 21
cents, and our relevant cost for this decision are 15 cents.
We should not accept this special offer, since we would lose 6
cents per dessert served.
Beware of Unit-Cost Data for decision-making purposes,
unitized fixed costs can be misleading.
Fixed costs often are allocated to individual units of product or
service for product-costing purposes.
For decision-making purposes, however, unitized fixed costs
can be misleading.
Remember that fixed costs are fixed in total, not on a per unit
basis.
Also, many fixed costs remain, regardless of a decision to
outsource or to continue to produce. (LO 14-5)
Add or Drop a Service, Product, or Department
One of the most important decisions managers make is whether
to add or drop a product, service, or department.
Let’s look at how the concept of relevant costs should be used
in such a decision.
14-29

31
40
Sometimes, managers want to drop a product or service because
it appears to be unprofitable. (LO 14-5)
Add or Drop a Product (1 of 5)
Worldwide Airways offers its passengers the opportunity to join
its World Express Club. Club membership entitles a traveler to
use the club facilities at the airport in Atlanta.
Club privileges include a private lounge and restaurant,
discounts on meals and beverages, and use of a small health spa.
14-30
32

41
Worldwide Airways offers its passengers the opportunity to join
its World Express Club.
Club membership entitles a traveler to use the club facilities at
the airport in Atlanta.
Club privileges include a private lounge and restaurant,
discounts on meals and beverages, and use of a small health spa.
(LO 14-5)
Sales $200,000
Less: Variable Costs:
Food/Beverage $70,000
Personnel 40,000
Variable overhead 25,000 (135,000)
Contribution Margin 65,000
Less: Fixed Costs:
Depreciation $30,000
Supervisor salary 20,000
Insurance 10,000
Airport fees 5,000
Allocated overhead 10,000 ( 75,000)
Loss $ ( 10,000)
14-31

33
42
The president of Worldwide Airways, is worried that the World
Express Club might not be profitable. Her concern is caused by
the statement of monthly operating income shown. In her
weekly staff meeting, Wing states her concern about the World
Express Club’s profitability.
The controller responds by pointing out that not all of the costs
on the club’s income statement would be eliminated if the club
were discontinued.
The vice president for sales adds that the club helps Worldwide
Airways attract passengers who it might otherwise lose to a
competitor.
As the meeting adjourns, Wing asks the controller to prepare an
analysis of the relevant costs and benefits associated with the
World Express Club. (LO 14-5)
KEEP CLUB ELIMINATE DIFFERENTIAL

Sales $200,000 0 $200,000
Food/Beverage (70,000) 0 (70,000)
Personnel (40,000) 0 (40,000)
Variable overhead (25,000) 0 (25,000)
Contribution Margin 65,000 0 65,000
Depreciation (30,000) (30,000) 0
Supervisor salary (20,000) 0 (20,000)
Insurance (10,000) (10,000) 0
Airport fees ( 5,000) 0 ( 5,000)
Allocated overhead (10,000) (10,000) 0
Loss $ (10,000) $(50,000) $ 40,000
14-32
33
42
The management accountant’s report contains two parts.
Above, the focus is on the relevant costs and benefits of the
World Express Club only, while ignoring any impact of the club
on other airline operations. In the first column the accountant
has listed the club’s revenues and expenses from the income
statement. The second column lists the expenses that will
continue if the club is eliminated. The third column is the
differential, or the difference between the two columns. (LO 14-

5)
*Not Avoidable
*Avoidable
Sales $200,000 0 $200,000
Food/Beverage (70,000) 0 (70,000)
Personnel (40,000) 0 (40,000)
Depreciation (30,000) (30,000) 0
Insurance (10,000) (10,000) 0
Airport fees ( 5,000) 0 ( 5,000)
Allocated overhead (10,000) (10,000) 0
Loss (10,000) (50,000) 40,000
14-33
33
42

These expenses are called unavoidable expenses. In other
words, these costs will continue if the club is either kept or
eliminated. Depreciation, insurance, and allocated overhead
costs will continue regardless of the decision, therefore
Worldwide cannot avoid them.
In contrast, the expenses appearing in the first column but not
the second are avoidable expenses. The airline will no longer
incur these expenses if the club is eliminated. Notice that all
variable costs are avoidable. In addition, supervisor salaries and
airport fees will be eliminated if the club is closed. The positive
$40,000 differential amount reflects the fact that the company is
$40,000 better off by keeping the club. (LO 14-5)
Sales $200,000 0 $200,000
Food/Beverage (70,000) 0 (70,000)
Personnel (40,000) 0 (40,000)
Avoidable fixed costs
Airport fees ( 5,000) 0 ( 5,000)
Profit/Loss $ 40,000 $ 40,000
Worldwide airlines would also lose the contribution margin of
$65,000 but only $25,000 in fixed expenses. The club
contributes $40,000 to Worldwide’s fixed costs.

14-34
33
42
The conclusion of the first part of the controller’s report is that
the club should not be eliminated.
If the club is closed, the airline will lose more in contribution
margin, $65,000, than it saves in avoidable fixed expenses,
$25,000.
Thus, the club’s $65,000 contribution margin is enough to cover
the avoidable fixed expenses of $25,000 and still contribute
$40,000 toward covering the airline’s overall fixed expenses.
(LO 14-5)
Contribution margin from
general airline operations

that will be forgone if club
is eliminated: $ 60,000 –0– $ 60,000
Profit/Loss: $ 40,000 –0– $ 40,000
Monthly profit of
KEEPING the club open $100,000
=======
Worldwide is better off by $100,000 per month by keeping its
club open.
The Opportunity Cost of lost contribution margin is $60,000.
14-35
Conclusion: Keep the Club Open!
42
51
Now consider the second part of the controller’s analysis, the
effect on Worldwide as a whole. As the vice president for sales
pointed out, the World Express Club is an attractive feature to
many travelers.
The controller estimates that if the club were discontinued, the
airline would lose $60,000 each month in forgone contribution
margin from general airline operations. This loss in contribution
margin would result from losing to a competing airline current
passengers who are attracted to Worldwide Airways by its

World Express Club. This $60,000 in forgone contribution
margin is an opportunity cost of the option to close down the
club. Considering both parts of the controller’s analysis,
Worldwide Airways’ monthly profit will be greater by $100,000
if the club is kept open.
Recognition of two issues is key to this conclusion. First, only
the avoidable expenses of the club will be saved if it is
discontinued. Second, closing the club will adversely affect the
airline’s other operations. Worldwide should keep the club
open. (LO 14-5)
Learning Objective 14-6 – Analyze manufacturing decisions
involving joint products and limited resources.
14-36
Learning Objective 14-6. Analyze manufacturing decisions
involving joint products and limited resources.
Special Decisions in Manufacturing Firms
Joint Products:
Sell or Process Further
A joint production process resulting in two or more products.
The point in the production process where the joint products are
identifiable as separate products is called the split-off point.

14-37
Joint production processes make two or more different products
using some similar beginning process.
An example of this might be a basic coffee maker. The basic
coffee maker is produced, then a timer is added to the premium
coffee maker. The split-off point is where we have two
differently identifiable products. (LO 14-6)
Cocoa beans
costing $500
per ton
Joint Production
process costing
$600 per ton
Cocoa butter
sales value
$750 for
1,500 pounds
Cocoa powder
sales value
$500 for
500 pounds
Separable
process
costing
$800
Instant cocoa
mix sales value
$2,000 for

500 pounds
Total joint cost:
$1,100 per ton
Split-off point
14-38
Joint Processing of Cocoa Beans
Cocoa beans are processed for all finished chocolate pr oducts.
When the cocoa beans are finished, they can be used to produce
two different finished products, cocoa butter and cocoa powder.
The cocoa powder can then be sold as is, or, used to produce
instant cocoa mix. (LO 14-6)
Joint Products (1 of 3)
Relative Sales Value Method
$750 …
Capital Expenditure Decisions

16-1
Chapter 16
Chapter 16: Capital Expenditure Decisions
Learning Objective 16-1 – Use the net-present-value method
and the internal-rate-of-return method to evaluate an investment
proposal.
16-2
Learning Objective 16-1. Use the net-present-value method and
the internal-rate-of-return method to evaluate an investment
proposal.
Discounted-Cash-Flow Analysis

16-3
Decisions involving cash inflows and outflows beyond the
current year are called capital-budgeting decisions.
Discounted-cash-flow analysis accounts for the time value of
money in such decisions.
Managers in all organizations periodically face major decisions
that involve cash flows over several years. Decisions involving
the acquisition of machinery, vehicles, buildings, or land are
examples of such decisions. Other examples include decisions
involving significant changes in a production process or adding
a major new line of products or services to the organization’s
activities.
Decisions involving cash inflows and outflows beyond the
current year are called capital-budgeting decisions.
Discounted-cash-flow analysis accounts for the time value of
money. It is a mistake to add cash flows occurring at different
points in time. The proper approach is to use discounted-cash-
flow analysis, which takes into account the timing of the cash
flows. There are two widely used methods of discounted-cash-

flow analysis: the net-present-value method and the internal-
rate-of-return method.
(LO 16-1)
Net-Present-Value Method
1. 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.
16-4
These four steps constitute a net-present-value analysis of an
investment proposal:
1. Prepare a table showing the cash flows during each year of
the proposed investment.
2. Compute the present value of each cash flow, using a
discount rate that reflects the cost of acquiring investment
capital. This discount rate is often called the hurdle rate or
minimum desired rate of return.
3. Compute the net present value, which is the sum of the
present values of the cash flows.
4. If the net present value (NPV) is equal to or greater than
zero, accept the investment proposal. Otherwise, reject it. (LO

16-1)
Net-Present-Value Method (2/5)
Mattson Co. has been offered a five year contract to provide
component parts for a large manufacturer.
16-5
Here a table has been prepared by Mattson’s accountant
showing the cash flows during each year of a proposed
investment to provide component parts to another manufacturer.
The proposal requires special equipment that would need to be
purchased if the proposal is accepted, associated cash revenue
and expense items are also included. (LO 16-1)
At the end of five years, the working capital will be released
and may be used elsewhere by Mattson.
Mattson uses a discount rate of 10%.
Should the contract be accepted?
16-6

Other information available is that the working capital required
to accept the proposal will be returned at the end of the
contract, and Mattson requires a minimum of a ten percent
hurdle rate.
We need to decide whether we should accept or reject the
proposal. (LO 16-1)
Annual net cash inflows from operations
16-7
First, we calculate the net annual cash inflows to Mattson.
Mattson would have net cash inflows of $80,000 per year for the
next five years if the proposal is accepted. (LO 16-1)
Mattson should accept the contract because the present value of
the cash inflows exceeds the present value of the cash outflows
by $85,955. The project has a positive net present value.
16-8

Two costs that would be incurred immediately if the proposal is
accepted are the investment in equipment and the immediate
need for working capital. The present value of those
expenditures are the same, because we would purchase the
equipment today and need the working capital today.
The annual net cash inflows would be received over a five-year
period, so we must bring that value back to the present, in order
to compare apples to apples. The present value of the net cash
inflows is $303,280.
We will also need to reline the equipment in three years at a
cost of $30,000. The present value of this amount is $22,530.
In addition, when the contract is completed, we will sell the
equipment. The present value of the salvage value is $3,105.
We then add together all of the present values. A positive net
present value means that the value of accepting the proposal
exceeds the negatives, and that the return on this investment is
at least as high as the hurdle rate. Considering the net present
value method only, this proposal should be accepted by
Mattson. (LO 16-1)
Internal-Rate-of-Return Method
The 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.
16-9

An alternative discounted-cash-flow method for analyzing
investment proposals is the internal-rate-of-return method.
An asset’s internal rate of return, or time-adjusted rate of return
is the true economic return earned by the asset over its life.
Another way of stating the definition is that an asset’s internal
rate of return, IRR, is the discount rate that would be required
in a net-present-value analysis in order for the asset’s net
present value to be exactly zero. (LO 16-1)
Internal-Rate-of-Return Method (2/5)
Black 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.
16-10
A new machine will cost $104,320 and will save Black
Company $20,000 per year in cash operating costs.
This machine will last ten years. (LO 16-1)
Future 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
= 5.216
16-11
The IRR is calculated by taking the amount of the investment
and dividing it by the net annual cash inflows.
This gives us a present value factor to enter into the tables with.
(LO 16-1)
$104,320
$20,000
= 5.216
The present value factor (5.216) is located on Table IV in
Appendix A. 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.
16-12
We look in a present value table across the ten-year line until
we find the number that is closest to our calculated factor.
We find our 5.216 factor under the 14% column.
This is the internal rate of return. (LO 16-1)

Here’s the proof . . .
16-13
To prove that 14% is the rate of return, we work backwards and
calculate the net present value to be zero.
The decision rule in the internal-rate-of-return method is to
accept an investment proposal if its internal rate of return is
greater than the organization’s cost of capital, or hurdle rate.
(LO 16-1)
Learning Objective 16-2 – Compare the net-present-value and
internal-rate-of-return methods, and state the assumptions
underlying each method.
16-14

Learning Objective 16-2. Compare the net-present-value and
internal-rate-of-return methods, and state the assumptions
underlying each method.
Comparing the NPV and IRR Methods
Net Present Value
The cost of capital is used as the actual discount rate.
Any project with a negative net present value is rejected.
Internal Rate of Return
The 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.
16-15
Calculation of the net present value is relatively simple.
The cost of capital is used as the actual discount rate and any
negative value is rejected because it does not return the hurdle
rate.
The internal rate of return, once calculated is compared to the
hurdle rate.
If the return is greater than the cost of capital, the project is
acceptable. (LO 16-2)
Comparing the NPV and IRR Methods (2/2)

The net-present-value method has the following advantages over
the internal-rate-of-return method:
Easier to use.
Easier to adjust for risk.
16-16
The net-present-value method exhibits two potential advantages
over the internal-rate-of-return method. First, if the investment
analysis is carried out by hand, it is easier to compute a
project’s NPV than its IRR. For example, if the cash flows are
uneven across time, trial and error must be used to find the IRR.
This advantage of the NPV approach is not as important,
however, when a computer is used.
A second potential advantage of the NPV method is that the
analyst can adjust for risk considerations. For some investment
proposals, the further into the future that a cash flow occurs, the
less certain the analyst can be about the amount of the cash
flow. Thus, the later a projected cash flow occurs, the riskier it
may be. It is possible to adjust a net-present-value analysis for
such risk factors by using a higher discount rate for later cash
flows than earlier cash flows. It is not possible to include such a
risk adjustment in the internal-rate-of-return method, because
the analysis solves for only a single discount rate, the project’s
IRR. (LO 16-2)
Assumptions Underlying
Discounted-Cash-Flow Analysis
All cash flows are treated as though they occur at year end.

Cash flows are treated as if they are known
with certainty.
Cash inflows are immediately reinvested at the required rate of
return.
Assumes a perfect capital market.
16-17
Some assumptions are made in discounted cash flow analyses.
In the present-value calculations used in the NPV and IRR
methods, all cash flows are treated as though they occur at year -
end. Most annual operating-cost savings actually would occur
uniformly throughout each year. The additional computational
complexity that would be required to reflect the exact timing of
all cash flows would complicate an investment analysis
considerably. The error introduced by the year-end cash-flow
assumption generally is not large enough to cause any concern.
Discounted-cash-flow analyses treat the cash flows associated
with an investment project as though they were known with
certainty. Although methods of capital budgeting under
uncertainty have been developed, they are not used widely in
practice. Most decision makers do not feel that the additional
benefits in improved decisions are worth the additional
complexity involved. As mentioned above, however, risk
adjustments can be made in an NPV analysis to partially
account for uncertainty about the cash flows.
Both the NPV and IRR methods assume that each cash inflow is
immediately reinvested in another project that earns a return for

the organization. In the NPV method, each cash inflow is
assumed to be reinvested at the same rate used to compute the
project’s NPV, the organization’s hurdle rate. In the IRR
method, each cash inflow is assumed to be reinvested at the
same rate as the project’s internal rate of return.
A discounted-cash-flow analysis assumes a perfect capital
market. This implies that money can be borrowed or lent at an
interest rate equal to the hurdle rate used in the analysis. (LO
16-2)
Choosing the Hurdle Rate
The discount rate generally is associated with the company’s
cost of capital.
The cost of capital involves a blending of the costs of all
sources of investment funds, both debt and equity.
16-18
The choice of a hurdle rate is a complex problem in finance.
The hurdle rate is determined by management based on the
investment opportunity rate.
This is the rate of return the organization can earn on its best
alternative investments of equivalent risk.
In general, the greater a project’s risk is, the higher the hurdle
rate should be. (LO 16-2)

Learning Objective 16-3 – Use both the total-cost approach and
the incremental-cost approach to evaluate an investment
proposal.
16-19
Learning Objective 16-3. Use both the total-cost approach and
the incremental-cost approach to evaluate an investment
proposal.
Comparing Two Investment Projects
To compare competing investment projects, we can use the
following net present value approaches:
Total-Cost Approach
Incremental-Cost Approach
16-20

The total-cost approach uses all of the relevant costs of each
proposal and are included in the analysis.
The incremental-cost approach is where just the difference in
the cost of each relevant item under the two alternative systems
is included in the analysis. (LO 16-3)
Total-Cost Approach
Each system would last five years.
12 percent hurdle rate for the analysis.
MAINFRAME PC _
Salvage value old system $ 25,000 $ 25,000
Cost 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 20,000 -
16-21
The computing system used by the city of Mountainview is
outdated. The city council has voted to purchase a new
computing system to be funded through municipal bonds. The

mayor has asked the city’s controller to make a recommendation
as to which of two computing systems should be purchased.
The two systems are equivalent in their ability to meet the
city’s needs and in their ease of use. The mainframe system
consists of one large mainframe computer with remote terminals
and printers located throughout the city offices. The personal
computer system consists of a much smaller mainframe
computer, a few remote terminals, and a dozen personal
computers, which will be networked to the small mainframe.
Mountainview’s accountant has prepared the above schedule of
net costs.
Before we begin the steps of the net-present-value method, let’s
examine the cash flow data in the slide to determine if any of
the data can be ignored as irrelevant. Notice that salvage value s
and datalink services do not differ between the two alternatives.
Regardless of which new computing system is purchased,
certain components of the old system can be sold now for
$25,000. Moreover, the datalink service will cost $20,000
annually, regardless of which system is acquired. If the only
purpose of the NPV analysis is to determine which computer
system is the least-cost alternative, then salvage values and
datalink services can be ignored as irrelevant, since they will
affect both alternatives’ NPVs equally. (LO 16-3)
Total-Cost Approach (2/3)
MAINFRAME ($) Time 0 Time 1 Time 2
Time 3 Time 4 Time 5
Acquisition cost computer (400,000)

Acquisition cost software ( 40,000)
System update ( 40,000)
Salvage value 50,000
Operating costs (335,000) (335,000) (335,000)
(335,000) (335,000)
Time sharing revenue 20,000 20,000
20,000 20,000 20,000
Total cash flow 440,000 (315,000) (315,000)
(355,000) (315,000) (265,000)
× Discount factor × 1.000 × .893 × .797 ×
.712 × .636 × .567
Present value (440,000) (281,295) (251,055)
(252,760) (200,340) (150,255)
SUM OF PRESENT VALUES = $(1,575,705)
PERSONAL COMPUTER ($)
Acquisition cost software ( 75,000)
System update ( 60,000)
Operating costs (235,000) (235,000) (235,000)
(235,000) (235,000)
Time sharing revenue -0- -0-
-0- -0- -0- _
Total cash flow 375,000 (235,000) (235,000)
(295,000) (235,000) (205,000)
× Discount factor × 1.000 × .893 × .797 ×
.712 × .636 × .567
Present value (375,000) (209,855) (187,295)
(210,040) (149,460) (116,235)
SUM OF PRESENT VALUES = $(1,247,885)
16-22

The slide shown here displays a net-present-value analysis of
the two alternative computing systems.
The exhibit uses the total-cost approach, in which all of the
relevant costs of each computing system are included in the
analysis.
Then the net present value of the cost of the mainframe system
is compared with that of the personal computer system. (LO 16-
3)
Total-Cost Approach (3/3)
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)
Mountainview should purchase the personal computer system
for a cost savings of $327,820.
16-23
Since the NPV of the costs is lower with the personal computer
system, that will be the controller’s recommendatio n to the
Mountainview City Council.
A decision such as Mountainview’s computing-system choice,
in which the objective is to select the alternative with the
lowest cost, is called a least-cost decision.
Rather than maximizing the NPV of cash inflows minus cash

outflows, the objective is to minimize the NPV of the costs to
be incurred. (LO 16-3)
Incremental-Cost Approach
INCREMENTAL ($)
Time 0 Time 1 Time 2 Time 3
Time 4 Time 5
Acquisition cost software 35,000
System update 20,000
Operating costs (100,000) (100,000) (100,000)
(100,000) (100,000)
Time sharing revenue 20,000 20,000
20,000 20,000 20,000
Total cash flow ( 65,000) ( 80,000) ( 80,000) (
80,000) ( 80,000) ( 60,000)
× Discount factor × 1.000 × .893 × .797 ×
.712 × .636 × .567
Present value ( 65,000) ( 71,440) ( 63,760)
( 42,720) ( 50,880) ( 34,020)
SUM OF PRESENT VALUES = $(327,820)
16-24
The slide shown here displays the incremental net-present-value
analysis of the city’s two alternative computing systems.
The result of this analysis is that the NPV of the costs of the
mainframe system exceeds that of the personal computer system
by $327,820. (LO 16-3)

Total-Incremental Cost Comparison
Total 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!!
16-25
The total-cost and incremental-cost approaches will always
yield equivalent conclusions.
Choosing between them is a matter of personal preference. (LO
16-3)
Managerial Accountant’s Role
Managerial 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.
16-26

To use discounted-cash-flow analysis in deciding about
investment projects, managers need accurate cash-flow
projections. This is where the managerial accountant plays an
important role. The accountant often is asked to predict cash
flows related to operating-cost savings, additional working-
capital requirements, or incremental costs and revenues. Such
predictions are difficult in a world of uncertainty. The
managerial accountant often draws upon historical accounting
data to help in making cost predictions. Knowledge of market
conditions, economic trends, and the likely reactions of
competitors can also be important in projecting cash flows. (LO
16-3)
Postaudit of Investment Projects
A postaudit is a follow-up after the project has been approved to
see whether or not expected results are actually realized.
16-27
The discounted-cash-flow approach to evaluating investment
proposals requires cash flow projections. The desirability of a
proposal depends heavily on those projections. If they are
highly inaccurate, they may lead the organization to accept
undesirable projects or to reject projects that should be pursued.

Because of the importance of the capital-budgeting process,
most organizations systematically follow up on projects to see
how they turn out. This procedure is called a postaudit or
reappraisal.
In a postaudit, the managerial accountant gathers information
about the actual cash flows generated by a project. Then the
project’s actual net present value or internal rate of return is
computed. Finally, the projections made for the project are
compared with the actual results. If the project has not lived up
to expectations, an investigation may be warranted to determine
what went awry.
Sometimes a postaudit will reveal shortcomings in the cash-flow
projection process. In such cases, action may be taken to
improve future cash-flow predictions. Two types of errors can
occur in discounted-cash-flow analyses; undesirable projects
may be accepted and desirable projects may be rejected. The
postaudit is a tool for following up on accepted projects.
Thus, a postaudit helps to detect only the first kind of error, not
the second. As in any performance-evaluation process, a
postaudit should not be used punitively.
The focus of a postaudit should provide information to the
capital-budgeting staff, the project manager, and the
management team. (LO 16-3)
Learning Objective 16-4 – Determine the after-tax cash flows in
an investment analysis.
16-28

Learning Objective 16-4. Determine the after-tax cash flows in
an investment analysis.
Income Taxes and Capital Budgeting
Cash flows from an investment proposal affect the company’s
profit and its income tax liability.
Income = Revenue − Expenses + Gains − Losses
16-29
26
18
When a business makes a profit, it usually must pay income
taxes, just as individuals do.
Since many of the cash flows associated with an investment
proposal affect the company’s profit, they also affect the firm’s
income-tax liability.

Any aspect of an investment project that affects any of the items
in this equation generally will affect the company’s income-tax
payments.
These income-tax payments are cash flows, and they must be
considered in any discounted-cash-flow analysis.
In some cases, tax considerations are so crucial in a capital -
investment decision that they dominate all other aspects of the
analysis. (LO 16-4)
After-Tax Cash Flows
Suppose High Country’s management is considering the
purchase of an additional delivery truck.
High Country will consider the after-tax cash flows from the
incremental sales revenue and expenses in order to assist in
their decision making.
16-30
The first step in a discounted-cash-flow analysis for a profit-
seeking enterprise is to determine the after-tax cash flows
associated with the investment projects under consideration. An
after-tax cash flow is the cash flow expected after all tax
implications have been taken into account. Each financial aspect
of a project must be examined carefully to determine its
potential tax impact.
High Country Department Stores, Inc., operates two department
stores in the city of Mountainview. The firm has a large
downtown store and a smaller branch store in the suburbs. The

company is quite profitable, and management is considering
several capital projects that will enhance the firm’s future profit
potential.
Some expenses, depreciation being one of them, require no cash
flows, yet they reduce the amount of taxable net income. (LO
16-4)
After-Tax Cash Flows (2/3)
Incremental sales revenue, net of cost of goods sold (cash
inflow)$ 50,000 Incremental income tax (cash outflow),
$50,000 × 30% (15,000)After-tax cash flow (net inflow after
taxes)$ 35,000
A quick method for computing the after-tax cash inflow from
incremental sales is:
16-31
The sales manager estimates that a new truck will allow the
company to increase annual sales …
Capital bias
Reducing human error in capital decision-making
A report by the
Center for Integrated Research

Deloitte’s Capital Efficiency practice helps organizations make
better and faster decisions by
assisting them in improving the quality of their capital
allocation decisions to enhance robustness,
efficiency, and return on investment.
Capital bias
The balancing act | 2
Choreographing the optimism bias, expert bias,
and narrow framing | 3
Mitigating biases in planning: The US Navy | 7
Prioritization: Leveling the playing field | 9
Stripping away your own organization’s biases | 11
Endnotes | 12
CONTENTS
1
A look at the S&P 500 suggests just how dif-ficult it can be to
consistently drive positive results. Take one measure, return on
in-
vested capital (ROIC). In a Deloitte study, neither

the amount of capital expenditures (as a percentage
of revenue) nor the growth in capital expenditure
demonstrated any kind of meaningful correlation
with ROIC.1 Regardless of industry, individual com-
panies can often have a difficult time maintaining
high and steady returns on their investments year
over year.
Given such uncertainty in capital allocation re-
sults, it may not be surprising that more than 60
percent of finance executives say they are not con-
fident in their organization’s ability to optimally al-
locate capital.2 After all, many companies are bal-
ancing competing priorities, diverse stakeholder
interests, and a complex variety of proposals that
can make capital allocation decisions even more dif-
ficult to execute in practice.
Why is this? On paper it seems practical enough
for everyone throughout the organization to be on
the same page. In an ideal world, a company estab-
lishes the goals and priorities; then, from senior
managers to frontline employees, everyone is ex-
pected to act in a manner that supports these man-
dates.
However, behavioral science, and possibly your
own experience, suggest it’s likely not always that
simple. Individuals at any level of an organization
may be overly optimistic about certain courses of
action, rely too much on specific pieces of informa-
tion (and people), or simply interpret the objective
through too narrow a lens (that may even run coun-
ter to other views on how to achieve these goals).

Within the behavioral science field, these are
referred to as cognitive biases and they exist in
many endeavors, not just capital planning. These
same biases can explain why we are too optimistic
about our retirement portfolios, can rely solely on
the opinions of experts in matters of health, and
narrowly frame our car buying decisions based on
a single attribute, such as fuel efficiency—ignoring
safety features, price, and aesthetic design. In the
language of the behavioral sciences, these translate
into the optimism bias, expert bias, and narrow
framing, respectively.
Though these biases, and many others, are ex-
tensively covered within the academic literature
and other fields, they are typically not as salient in
matters of capital planning.3 Despite this often lack
of coverage, the evidence from our research sug-
gests they may be no less prevalent.
In this article, we dissect which attributes can
help us identify these biases. We close with cases
from the US Navy and a large telecommunica-
tions provider that highlight how they can manifest
throughout the capital planning processes.
The balancing act
Whether launching a new product, investing in equipment, or
weighing the
merits of an acquisition, corporate executives typically rely on
their capital
planning process to help shape these high-stakes decisions.
Shareholders,
creditors, and employees alike expect management to take this
obligation

seriously, and get it right consistently. Firms that excel in
capital planning can
be amply rewarded, but this is often easier said than done.
Capital bias
2
BIASES can arise throughout many areas of daily life. From
how we choose a retirement plan to picking out jams at the
grocery store,
we often make unconscious, suboptimal decisions.4
Capital planning decisions may be no different.
From the original Nobel Prize-winning work of
psychologists Amos Tversky and Daniel Kahneman
to more recent findings, more than 80 different
cognitive biases have been identified over the last
40 years.5 Of these, three common biases seem to
stand out as likely to wreak havoc on capital deci-
sion-making: the optimism bias, expert bias, and
narrow framing.6 Here’s an in-depth look at how
they typically work, and how organizations can
avoid succumbing to their influence.
The optimism bias: Fueled
by overconfidence and
uncertainty avoidance
Optimism, while not categorically bad, is often
closely tied to overconfidence. Known to minimi ze
uncertainty, overconfidence can lead to perilous
outcomes. In his book, Thinking, Fast and Slow,

Daniel Kahneman recounts a multiyear study in-
volving autopsy results. Physicians surveyed said
they were “completely certain” with their diagnosis
while the patient was alive, but autopsies contra-
dicted those diagnoses 40 percent of the time.7
Another long-term study asked chief financial of-
ficers (CFOs) to predict the performance of a stock
market index fund, along with their own company’s
prospects. When asked to give an 80 percent confi-
dence internal (that is, provide a range of possible
outcomes they are 80 percent certain results will
fall within), only 33 percent of the results actually
fell within their estimates—and most miscalculated
in an overly optimistic manner.8 Interestingly, the
same CFOs who misjudged the market, misjudged
the return on investment (ROI) of their own proj-
ects by a similar magnitude.9 Kahneman explains
that people defer to overconfident and optimistic
predictions due to our distaste for uncertainty. If
the CFOs provided a broader, vaguer estimate, they
may fear perceptions that they weren’t up to the
task. This, in turn, could lead to decision paralysis
(that is, the inability or unwillingness to make a de-
cision due to such broad estimates) or could make
them appear inept or unqualified to do the job.
Choreographing the
optimism bias, expert bias,
and narrow framing
Most people accept
that overconfidence

and optimism exist.
It is far more difficult,
however, to identify
these behaviors while
they are happening.
3
Most people accept that overconfidence and
optimism exist. It is far more difficult, however, to
identify these behaviors while they are happening.
Here are two methods to consider using to deter-
mine if excessive optimism is setting in within your
organization:
Take a survey of past performance. Like
the CFO study, compare past projections to real-
ity. If the estimates systematically proved more op-
timistic than reality, there may be evidence of ex-
cessive optimism. But make sure you avoid letting
hindsight dictate this analysis too much. In the case
of individual performance, for example, if a man-
ager did exceedingly well in the past, leaders should
not assume he or she will achieve the same level of
performance in the future. (We will cover this more
in our discussion on expert bias).
Focus on data, not just narratives, to
make decisions. When we have little information
to go on, it can be easier to manufacture a coherent,
overly positive story to fill in the blanks. But those
decisions rarely end up to be solid ones. In profes-

sional sports, many have cited “intangibles” as the
reason they picked a player to be on their team—
only to regret the decision shortly down the road
when the data suggests these intangible character-
istics aren’t leading to tangible victories. When data
is scarce or ambiguous, it can be easier for the mind
to form a more confident narrative based upon an-
ecdotal evidence. But stories shouldn’t be enough to
go on when making big decisions, such as multimil-
lion-dollar capital decisions.
The expert bias: What
happens when we rely
upon the “expert”?
Often, we are guiltiest of believing and act-
ing upon overly optimistic views when they derive
from “experts.” This could be your company’s lead
software engineer, the vice president of sales who
knows “what the customer really wants,” or even
the CEO. When we simply accept an expert’s opin-
ion or even our own, vs. seeking out additional in-
formation from a variety of sources, we fall victim
to the expert bias.
How bad can it get? In many cases, the experts
can prove to be no better at making predictions
than random chance would be. In his book, Ex-
pert Political Judgment, Philip Tetlock analyzed
more than 20 years of political pundits’ predictions
on a variety of policy and economic outcomes.10
When tracked (but not necessarily held account-
able), these experts performed about as well as they
would had they randomly guessed. Even more dis-
turbing, with greater fame usually comes greater

inaccuracy—a stark illustration of how people value
confidence over uncertainty.
One could argue that there is a big difference
between heeding the advice of a TV personality and
an analyst who is augmenting their predictions with
data. For the most part, we would likely agree, but
following even the best expert can also be danger-
ous.11 Just because someone was the most accurate
in the past does not mean we should only rely on his
or her opinions going forward.
Illustrating this point, one study asked MBA
students to predict six economic indicators by ei-
ther relying solely on the most accurate economist
based on past performance or an average of three to
six well-respected economists’ forecasts.12 While 80
percent of the students chose to rely on the single
How bad can it get? In
many cases, the experts
can prove to be no better
at making predictions
than random chance
would be.
Capital bias
4
top performer, the average estimates routinely per-
formed better. This showed that when making de-
cisions, relying on a number of informed opinions
can be better than chasing a top expert’s past per-

formance.
These studies, along with the conversation on
optimism suggest two things: First, a display of
confidence does not necessarily translate into better
results. Instead, it may signal a degree of ignorance
(or arrogance). Second, a good group of people
making a decision usually outweighs relying on the
“best” person to make the decision.
Narrow framing: Narrow
perspectives lead to
wide miscalculations
Another common, potentially perilous behav-
ior people often exhibit when making decisions is
engaging in narrow framing. Here, people isolate
problems, regardless of how broadly defined, into
smaller, individual decisions. So rather than aggre-
gating decisions into a portfolio of interdependent
choices, they tackle them individually. At face value,
this may sound intuitive. In practice, though, it can
lead to the mismanagement of risk and an isolated
view of problems.
Consider this hypothetical question from Tver-
sky and Kahneman:13
Which would you prefer?
(A) A guaranteed $240 reward or
(B) A 25 percent chance to win a $1,000
reward with a 75 percent chance to win $0.
In this case, more than 80 percent of respon-

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