CHAPTERMANAGERIALACCOUNTING.pptVIP

Discuss the capital budgeting evaluation process, and explain what inputs are used in capital budgeting. Describe the cash payback technique. Explain the net present value method. Identify the challenges presented by intangible benefits in capital budgeting. Capital Budgeting Evaluation ProcessStudy Objective 1 Many companies follow a carefully prescribed process in capital budgeting. At least once a year: 1) Proposals for projects are requested from each department. 2) The proposals are screened by a capital budgeting committee, which submits its finding to officers of the company. 3) Officers select projects and submit list of projects to the board of directors. Capital Budgeting Evaluation Process The capital budgeting decision depends depends on a variety of considerations: 1) The availability of funds. 2) Relationships among proposed projects. 3) The company’s basic decision-making approach. 4) The risk associated with a particular project. Cash Payback FormulaStudy Objective 2 Estimated Annual Net Income from Capital Expenditure Computation of Annual Cash Inflow Cash income per year equals net income plus depreciation expense. Cash Payback Period 3.33 years Net Present Value MethodStudy Objective 3 The present value method technique is generally recognized as the best conceptual approach to making capital budgeting decisions. This technique considers both the estimated total cash inflows and the time value of money. Two methods are used with the discounted cash flow technique: 1) net present value and 2) internal rate of return Net Present Value Method Under the net present value method, cash inflows are discounted to their present value and then compared with the capital outlay required by the investment. The interest rate used in discounting the future cash inflows is the required minimum rate of return. A proposal is acceptable when NPV is zero or positive. The higher the positive NPV, the more attractive