AccountingPrinciplesIncrementalAnalysisandCapitalBudgeting幻灯片.pptxVIP

26Incremental Analysis and Capital BudgetingLearning ObjectivesDescribe management’s decision-making process and incremental analysis.1Analyze the relevant costs in various decisions involving incremental analysis.2Contrast annual rate of return and cash payback in capital budgeting.3Distinguish between the net present value and internal rate of return methods.4Describe management’s decision-making process and incremental analysis.LEARNINGOBJECTIVE1Making decisions is an important management function.Does not always follow a set pattern.Decisions vary in scope, urgency, and importance.Steps usually involved in process include:Illustration 26-1Management’s decision-making processLO 1Decision-Making ProcessIn making business decisions,Considers both financial and non-financial information.Financial information Revenues and costs, andEffect on overall profitability.Nonfinancial information Effect on employee turnoverThe environmentOverall company image.LO 1Incremental Analysis ApproachDecisions involve a choice among alternative actions.Process used to identify the financial data that change under alternative courses of action.Both costs and revenues may vary orOnly revenues may vary orOnly costs may varyLO 1How Incremental Analysis WorksIllustration 26-2Basic approach in incremental analysisAlternative BIncremental revenue is $15,000 less.Incremental cost savings of $20,000 is realized.Produces $5,000 more net income.LO 1How Incremental Analysis WorksImportant concepts used in incremental analysis:Relevant costOpportunity costSunk costLO 1How Incremental Analysis WorksSometimes involves changes that seem contrary to intuition.Variable costs sometimes do not change under alternatives.Fixed costs sometimes change between alternatives.LO 1Service Company InsightAmerican ExpressThat Letter from AmEx Might Not Be a BillNo doubt every one of you has received an invitation from a credit card company to open a new account—some of you have probably received three in one day.