The document discusses capital expenditures and tools for evaluating long-term investment decisions. It provides examples of how Netflix and AT&T used net present value (NPV) and internal rate of return (IRR) analyses to evaluate expanding their facilities. Both alternatives provided positive cash flows but expanding at the current facility was less capital intensive and avoided travel costs and time loss. The document also summarizes how Disney Cruise Line used NPV and IRR models to determine a new Mediterranean itinerary would have a 67% IRR and $6.4M NPV, leading them to approve the new route.

1. Capital Expenditures Team 6 Managerial Accounting Nov. 2, 2006

2. What is a Capital Expenditure? When a firm is faced with a major financial decision such as: Building a new plant Starting a new branch Buying new machinery Make or buy decisions

3. Capital Budgeting Long-term investments the firm undertakes and the decisions made to finance them: Estimating future cash flows Deciding on an appropriate interest rate for discounting those cash flows Deciding how to finance the project What tools or analysis would a company use to make these decisions?

4. Tools for Making Decisions Discount Cash Flow Methods Aid in evaluating investments over time Net Present Value – NPV The value in today’s dollars of future payments received at a predetermined discount rate Internal Rate of Return – IRR The discount rate that equates the net present value to zero

5. What is the Discount Rate? Interest rate used for computing the present value of future cash flows Interest Rate consists of three main components Pure Rate – the interest rate of a risk less investment Risk of Project - more risk equals higher expected return Increase in future inflation – expected future inflation should be accounted for

6. Other Considerations The decision making process also includes: Past experience Judgment Competition And many others…

7. AT&T Example Limited Space: Significant Funding Increase will require additional Headcount at AT&T site Future Cash Flows OH Generation from AT&T employees 3 rd Fl @ Current Facility is Available LONG TERM LEASE REQUIRED Findings Exceed AT&T thresholds For approval Find additional space Financial analysis required for affordability and profitability 3 rd Fl @ Current Facility Approved Move in Nov 2006 AT&T building 30 Miles away NO LONG TERM LEASE REQUIRED Evaluation of NPV & IRR of expansion

8. AT&T Results Using NPV and IRR allowed AT&T to financially evaluate the two alternatives. Both alternatives provided positive cash flow to AT&T Alternate facility was less capital intensive however… Too far from customer Local Travel Costs Time Loss Current Facility 3 rd Floor provided Positive cash flow No time loss for travel Maximize customer interactions

9. Disney Cruise Line Case Should Disney Cruise Line create a new itinerary in the Mediterranean?

10. Analysis TRIP 1 -- Cruise from Port Canaveral to Barcelona (14-night Trans-Atlantic itinerary)

11. Trips 2-6 All Trips now 10 days Trip 3 95% Occupancy Trip 4 – 5 100% Occupancy Trip 6 75% Occupancy

12. Results of Model Total NIBT = $7,560,000 Assume 12.5% Interest Rate IRR = 67% NPV @ 12.5% (3/12) = $6,462,085

13. Disney Cruise Line Example Other Considerations Reasons for new guests to sail aboard DCL and repeat guests to come back Highly successfully Mexican Riviera itinerary from Los Angeles in 2005 (past experiences) Other cruise lines prove successful with Mediterranean itineraries (competitors)

14. Who uses this information People of influence to the organization Managers Analysts Executives (CFO, CEO)

15. Goal Achievement Allows managers to make sound financial decisions based upon a mathematical model Helps foster growth and assists company in reaching goals Production Goals Financial Goals Sales Goals

16. Questions?