Professional Documents
Culture Documents
PowerPoint Presentation by
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
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.
Continued
2
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
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.
Continued
3
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
7. Convert gross cash flows to after-tax flows.
8. Describe capital investment in advanced
manufacturing environment.
LO 1
LO 1
CAPITAL INVESTMENT
METHODS
Methods used to guide managers
investment decisions are:
Nondiscounting
period
Payback
Payback period
Accounting rate of return
Discounting
Net present value (NPV)
Internalrate
rate
return
(IRR)
Internal
ofof
return
(IRR)
6
LO 2
PAYBACK
PAYBACK PERIOD:
PERIOD: Definition
Definition
LO 2
Payback period
= Original investment Annual cash flows
= $1,000,000 / $500,000
= 2 years
8
LO 2
Avoids obsolescence
9
LO 2
CAD DECISION
Payback period
Investment
CAD A
CAD - B
Year 1
Year 2
Year 3
Year 4
Year 5
110,000
25,000
25,000
25,000
LO 2
PAYBACK
PAYBACK PERIOD:
PERIOD: Summary
Summary
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
11
LO 3
LO 3
LO 3
EXHIBIT 13.2
14
LO 3
EXHIBIT 13.2
15
LO 4
FORMULA: IRR
IRR measures a projects rate of return against
a hurdle rate for accepting projects.
IRR
= Investment Annual cash flows
= $1,200,000 / $499,500
= 2.402 (12%)
16
LO 5
POSTAUDIT:
POSTAUDIT: Definition
Definition
17
LO 5
Costs
Costly
Operating environment different from original assumptions
18
LO 6
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
19
LO 6
20
LO 6
POLUTION CONTROL
Investment
Annual revenues
Design A Design B
$179,460 $239,280
119,460
169,280
180,000
210,000
5 years
5 years
Project life
LO 6
EXHIBIT 13.3
Design A
Design B
22
LO 6
EXHIBIT 13.3
Design A
Design B
23
LO 7
24
LO 7
EXHIBIT 13.4
25
LO 7
LO 8
27
CHAPTER 13
THE
THE END
END
28