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Management accounting: Information for creating and managing value (4/e): Chapter 21 - Kim Langfield-Smith, Helen Thorne

Chapter 21 - Capital expenditure decisions: an introduction. This chapter presents the following content: Capital expenditure decisions, the capital expenditure approval process, techniques for analysing capital expenditure proposals, discounted cash flow analysis,. | Chapter 21 Capital expenditure decisions: an introduction 21- 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 21- The capital expenditure approval process Project generation Often initiated by managers in business units Consistent with strategic plan and corporate guidelines Managers may use their discretion and not submit projects that may be acceptable to the business, but which may pose some risk for their division Evaluation and analysis of projected cash flows Over the life of the project Difficult to detect biases in estimates of cash flows Divisional managers may have the best knowledge of their business and market continued 21- The capital expenditure approval process Progress to approval The larger the project, the higher the level of authority for final 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 corporate management continued 21- 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 21- Techniques for analysing capital expenditure proposals Consider costs and benefits of the project over several years 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 from the sale of assets that result from a project continued 21- Techniques for analysing capital expenditure proposals Techniques Payback method Accounting rate of . | Chapter 21 Capital expenditure decisions: an introduction 21- 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 21- The capital expenditure approval process Project generation Often initiated by managers in business units Consistent with strategic plan and corporate guidelines Managers may use their discretion and not submit projects that may be acceptable to the business, but which may pose some risk for their division Evaluation and analysis of projected cash flows Over the life of the project Difficult to detect biases in estimates of cash flows Divisional managers may have the best knowledge of their business and market continued 21- The capital expenditure approval process Progress to approval The larger the project, the higher the level of authority .