Mana的gement Accounting Ch11_Stu.ppt

* In practice, managers very rarely look at only one project or option at a time. Instead, managers compare several options to see which is the best or most profitable. We will now see how to use NPV to compare two or more alternatives. Two common methods for comparing alternatives are (1) the total project approach and (2) the differential approach. * The total project approach computes the total impact on cash flows for each alternative and then converts these total cash flows to their present values. It is the most popular approach, and we can use it for any number of alternatives. The alternative with the largest NPV of total cash flows is best. * The differential approach computes the differences in cash flows between alternatives and then converts these differences to their present values. We cannot use this method to compare more than two alternatives. Often, the two alternatives being compared are (1) invest in a project and (2) do nothing. * When you array the relevant cash flows, be sure to consider three types of inflows and outflows: (1) initial cash inflows and outflows at time zero, (2) future disposal values, and (3) operating cash inflows and outflows. * The major purpose of most investments is to affect operating cash inflows and outflows. Many of these effects are difficult to measure, and three points deserve special mention: 1. The only relevant cash flows are those that will differ among alternatives. Often, fixed overhead will be the same under all the available alternatives. If so, you can safely ignore it. In practice, it is not easy to identify exactly which costs will differ among alternatives. 2. Remember that you are predicting cash inflows and outflows, not revenues and expenses. Therefore, you should ignore depreciation and book values. We recognize the cost of assets by the initial outlay, not by depreciation as computed under accrual accounting. Further, cash inflows may not occur in the same period as the related revenues, and cash o