Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 13 Capital Investment Decisions

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© Copyright 2007 Thomson South-Western, a part of The
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STUDENT EDITION
MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
13 CAPITAL INVESTMENT DECISIONS

2. LLEEAARRNNIINNGG OOBBJJEECCTTIIVVEESS
1. Explain what a capital investment decision
is; distinguish between independent &
mutually exclusive decisions.
2. Compute payback period, accounting rate
of return for proposed investment; explain
their roles.
3. Use net present value analysis for capital
investment decision of independent
projects.
2
Continued

3. LLEEAARRNNIINNGG OOBBJJEECCTTIIVVEESS
4. Use internal rate of return to assess
acceptability of independent projects.
5. Discuss the role and value of postaudits.
6. Explain why NPV is better than IRR for
capital investment decisions of mutually
exclusive projects.
3
Continued

4. LLEEAARRNNIINNGG OOBBJJEECCTTIIVVEESS
7. Convert gross cash flows to after-tax flows.
8. Describe capital investment in advanced
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manufacturing environment.

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How do the 2 types of
capital budgeting differ?
In capital budgeting, decisions to
accept/reject an independent project
does not affect decisions about
another project whereas acceptance of
a mutually exclusive project
precludes other projects.
LO 1

6. CAPITAL INVESTMENT
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METHODS
Methods used to guide managers’
investment decisions are:
 Nondiscounting
 period
 Accounting rate of return
 Discounting
 Net present value (NPV)
 Internal rate of return (IRR)
LO 1
Payback period
Internal rate of return (IRR)

7. PPAAYYBBAACCKK PPEERRIIOODD:: DDeeffiinniittiioonn
Is the time required for a firm
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to recover its original
investment.
LO 2

8. FORMULA: Payback Period
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Payback period tells how long it will take a
project to break even.
LO 2
Payback period
= Original investment ÷ Annual cash flows
= $1,000,000 / $500,000
= 2 years

9. PAYBACK PERIOD: Uses
Sets maximum payback period for all projects;
rejects any that exceed payback period
Measures risk
Riskier firms use shorter payback period
In liquidity problems, use shorter payback period
Avoids obsolescence
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LO 2

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CAD DECISION
LO 2
Investment Year 1 Year 2 Year 3 Year 4 Year 5
CAD – A $ 90,000 $ 60,000 $ 50,000 $ 50,000 $ 50,000
CAD - B 40,000 110,000 25,000 25,000 25,000
Payback period does not
distinguish between the 2
investments because the
payback periods are equal
but the return after payback
is different.
Payback period
}

11. PPAAYYBBAACCKK PPEERRIIOODD:: SSuummmmaarryy
Payback period provides information that can be
used to help
Control risks of uncertain future cash flows
Minimize impact of investment on liquidity
problems
Control risk of obsolescence
Control effects of investment on performance
measures
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LO 2

12. FORMULA: Accounting Rate of
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Return
Accounting rate of return is a nondiscounting
model of return on a project.
LO 3
Accounting rate of return
= Average income ÷ Original investment (or
Average investment)
= ($36,000 - $20,000) / $100,000 = 16% or
= ($36,000 - $20,000) / $50,000 = 32%

13. NPV: What You Need to Know
Present value of project’s cost
Cash inflow to be received in each period
Useful life of project
rate of return (hurdle rate)
Time period
Present value of project’s future cash inflows
Discount factor
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LO 3
Required rate of return

14. CASH FLOW: Step 1
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LO 3
EEXXHHIIBBIITT 1133..22
The first step in
calculating the
NPV is to
determine the total
cash flows of the
project.

15. CASH FLOW: Step 2
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LO 3
EEXXHHIIBBIITT 1133..22
The second step is
to calculate the
present value of the
annual cash flows.

16. FORMULA: IRR
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IRR measures a project’s rate of return
against a hurdle rate for accepting projects.
LO 4
IRR
= Investment ÷ Annual cash flows
= $1,200,000 / $499,500
= 2.402 (12%)

17. PPOOSSTTAAUUDDIITT:: DDeeffiinniittiioonn
Compares actual benefits to
estimated benefits & actual
operating costs to estimated
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operating costs.
LO 5

18. POSTAUDIT Cost-Benefit Analysis
Benefits
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Ensures resources are used wisely
Additional funds for profitable projects
Corrective action when needed
Impacts managerial behavior
Managers held accountable for decisions
Decisions made in best interest of firm
Costs
Costly
Operating environment different from original assumptions
LO 5

19. COMPARING NPV & IRR
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Similarities
NPV & IRR yield same decision for independent projects
Differences
Cash inflows: NPV assumes reinvested at same rate but
IRR assumes reinvested at IRR rate
NPV measures profitability in absolute terms but IRR
measures in relative terms
Choosing projects: NPV consistent with maximizing
shareholder wealth while IRR does not always provide
results that will maximize wealth
LO 6

20. SELECTING BEST PROJECTS
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Selection process
Assess cash flow pattern for each project
Compute NPV for each project
Identify project with greatest NPV
LO 6

21. POLUTION CONTROL
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LO 6
Investment Design A Design B
Annual revenues $179,460 $239,280
Annual operating costs 119,460 169,280
Equipment (before Y1) 180,000 210,000
Project life 5 years 5 years
While both projects offer a 20%
return evaluated by IRR, Design B
offers a NPV of $42,350 while
Design A offers a NPV of $36,300.

22. IRR ANALYSIS: Panel B
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LO 6
EEXXHHIIBBIITT 1133..33
IRR produces same
result for both
designs.
Design A
Design B

23. NPV ANALYSIS: Panel C
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LO 6
EEXXHHIIBBIITT 1133..33
NPV shows that
Design B is best.
Design A
Design B

24. COMPUTING CASH FLOWS
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To compute project cash flows,
First forecast revenues, expenses, & capital
outlays
Then adjust gross cash flows for inflation & tax
effects
LO 7
inflation

25. CASH FLOWS & INFLATION
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LO 7
EEXXHHIIBBIITT 1133..44
The project will not
be accepted unless
an inflation
adjustment is done.

26. FORMULA: After-Tax Cash
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Flows
After-tax cash flows help evaluate project
acceptability.
LO 7
After-tax cash flows
= After-tax net income + Noncash expenses
= $90,000 + $200,000
= $290,000

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Is financial information the
only information used to set
criteria for project
evaluation?
NO. Both financial and nonfinancial
information are used to set criteria in
an advanced manufacturing
environment.
LO 8

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CHAPTER 13
TTHHEE EENNDD