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Lecture Management accounting: An Australian perspective: Chapter 20 - Kim Langfield-Smith

Lecture Management accounting: An Australian perspective - Chapter 20 introduce the capital expenditure decisions. This chapter include objectives: The capital expenditure approval process, techniques for analysing capital expenditure proposals, discounted cash flow analysis,. | Chapter 20 Capital expenditure decisions: an introduction Capital expenditure decisions Long-term decisions requiring the evaluation of cash inflows and outflows over several years to determine the acceptability of the project Significant impact on the competitiveness of the business Focus on specific projects and programs The capital expenditure approval process Project generation Often initiated by managers in business units Consistent with strategic plan and corporate guidelines Evaluation and analysis of projected cash flows Over the life of the project Difficult to detect biases in estimates of cash flows continued The capital expenditure approval process Progress to approval The larger the project the high is the authority level for approval A political process may take place due to strong competition for project approval Initiators need to justify and ‘sell’ the project Analysis and selection of projects by senior management continued The capital expenditure . | Chapter 20 Capital expenditure decisions: an introduction Capital expenditure decisions Long-term decisions requiring the evaluation of cash inflows and outflows over several years to determine the acceptability of the project Significant impact on the competitiveness of the business Focus on specific projects and programs The capital expenditure approval process Project generation Often initiated by managers in business units Consistent with strategic plan and corporate guidelines Evaluation and analysis of projected cash flows Over the life of the project Difficult to detect biases in estimates of cash flows continued The capital expenditure approval process Progress to approval The larger the project the high is the authority level for approval A political process may take place due to strong competition for project approval Initiators need to justify and ‘sell’ the project Analysis and selection of projects by senior management continued The capital expenditure approval process Implementation of projects May involve the construction or purchase of new assets, staff training, new staff Post-completion audit of projects A year or more after the project is implemented Evaluation of accuracy of the initial plan and cash flows Outcomes of the project Techniques for analysing capital expenditure proposals Consider costs and benefits of the project Cash outflows The initial cost of the project and operating costs over the life of the project Cash inflows Cost savings and additional revenues and any proceeds of sale of assets that result from a project continued Techniques for analysing capital expenditure proposals Techniques Payback method Accounting rate of return Discounted cash flow (DCF) techniques DCF techniques explicitly consider the time value of money Discounted cash flow analysis A technique used in investment decisions to take account of the time value of money Makes future cash flows equivalent to those in the current year .