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Lecture Managerial accounting for managers - Chapter 8: Capital budgeting decisions

The term capital budgeting is used to describe how managers plan significant cash outlays on projects that have long-term implications, such as the purchase of new equipment and the introduction of new products. This chapter describes several tools that can be used by managers to help make these types of investment decisions. | Capital Budgeting Decisions Chapter 8 Chapter 8: Capital Budgeting Decisions The term capital budgeting is used to describe how managers plan significant cash outlays on projects that have long-term implications, such as the purchase of new equipment and the introduction of new products. This chapter describes several tools that can be used by managers to help make these types of investment decisions. Typical Capital Budgeting Decisions Plant expansion Equipment selection Lease or buy Cost reduction Capital budgeting analysis can be used for any decision that involves an outlay now in order to obtain some future return. Typical capital budgeting decisions include: Cost reduction decisions. Should new equipment be purchased to reduce costs? Expansion decisions. Should a new plant or warehouse be purchased to increase capacity and sales? Equipment selection decisions. Which of several available machines should be purchased? Lease or buy decisions. Should new equipment be leased or . | Capital Budgeting Decisions Chapter 8 Chapter 8: Capital Budgeting Decisions The term capital budgeting is used to describe how managers plan significant cash outlays on projects that have long-term implications, such as the purchase of new equipment and the introduction of new products. This chapter describes several tools that can be used by managers to help make these types of investment decisions. Typical Capital Budgeting Decisions Plant expansion Equipment selection Lease or buy Cost reduction Capital budgeting analysis can be used for any decision that involves an outlay now in order to obtain some future return. Typical capital budgeting decisions include: Cost reduction decisions. Should new equipment be purchased to reduce costs? Expansion decisions. Should a new plant or warehouse be purchased to increase capacity and sales? Equipment selection decisions. Which of several available machines should be purchased? Lease or buy decisions. Should new equipment be leased or purchased? Equipment replacement decisions. Should old equipment be replaced now or later? Time Value of Money A dollar today is worth more than a dollar a year from now. Therefore, projects that promise earlier returns are preferable to those that promise later returns. The time value of money concept recognizes that a dollar today is worth more than a dollar a year from now. Therefore, projects that promise earlier returns are preferable to those that promise later returns. Time Value of Money The capital budgeting techniques that best recognize the time value of money are those that involve discounted cash flows. The capital budgeting techniques that best recognize the time value of money are those that involve discounted cash flows (the concepts of discounting cash flows and using present value tables are explained in greater detail in Appendix 14A). The Net Present Value Method To determine net present value we . . . Calculate the present value of cash inflows, Calculate the present