Professional Documents
Culture Documents
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
MANAGEMENT
ACCOUNTING
8th EDITION
BY
LEARNING
OBJECTIVES
LEARNING GOALS
LEARNING 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
3
LEARNING 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
4
LEARNING OBJECTIVES
7. Convert gross cash flows to after-tax flows.
8. Describe capital investment in advanced
manufacturing environment.
LEARNING OBJECTIVE
10
LO 1
CAPITAL INVESTMENT
DECISIONS: Definition
LO 1
LO 1
What is a reasonable
return on a capital
investment?
13
LO 1
CAPITAL INVESTMENT
METHODS
Methods used to guide managers
investment decisions are:
Nondiscounting
Payback period
Accounting rate of return
Discounting
Net present value (NPV)
Internal rate of return (IRR)
14
LEARNING OBJECTIVE
Compute payback
period, accounting rate
of return for proposed
investment; explain
their roles.
15
LO 2
16
LO 2
17
LO 2
Payback period
= Original investment Annual cash flows
= $1,000,000 / $500,000
= 2 years
18
LO 2
Avoids obsolescence
19
LO 2
20
LO 2
21
LO 2
CAD DECISION
Payback period
Investment
CAD A
CAD - B
Year 1
Year 2
Year 3
Year 4
Year 5
LO 2
LO 2
24
LO 2
LO 2
LEARNING OBJECTIVE
27
LO 3
28
LO 3
LO 3
ANALYZING NPV
When NPV is positive:
The initial investment has been recovered
The required rate of return has been
achieved
A return in excess of (1) & (2) has been
received
30
LO 3
LO 3
EXHIBIT 13.2
32
LO 3
EXHIBIT 13.2
33
LEARNING OBJECTIVE
34
LO 4
35
LO 4
36
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%)
37
LO 4
38
LEARNING OBJECTIVE
39
LO 5
POSTAUDIT: Definition
40
LO 5
LO 5
POSTAUDIT RESULTS
In the case of Honley Medicals investment in
RF, the postaudit concluded that the
investment was a poor decision. Benefits:
Complaints decreased
Fewer rejections
Direct labor & materials costs decreased
Costs:
Investment & operating costs higher
Costs outweighed benefits
42
LO 5
Costs
Costly
Operating environment different from original assumptions
43
LEARNING OBJECTIVE
44
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
45
LO 6
46
LO 6
LO 6
POLUTION CONTROL
Investment
Annual revenues
Annual operating costs
Equipment (before Y1)
Project life
Design A Design B
$179,460 $239,280
119,460 169,280
180,000
210,000
5 years
5 years
LO 6
EXHIBIT 13.3
49
LO 6
EXHIBIT 13.3
Design A
Design B
50
LO 6
EXHIBIT 13.3
Design A
Design B
51
LEARNING OBJECTIVE
52
LO 7
53
LO 7
EXHIBIT 13-4
54
LO 7
= $90,000 + $200,000
= $290,000
55
LEARNING OBJECTIVE
Describe capital
investment in advanced
manufacturing
environment.
56
LO 8
57
CHAPTER 13
THE END
58