《ACCA考试之财务管理 FINANCIAL MANAGEMENT》课件PPT 11 Specific investment decisions.ppt

* Asset replacement decisions The factors to be considered when making replacement decisions are as follows: Capital cost of new equipment-the higher cost of equipment will have to be balanced against known or possible technical improvements Operating costs – operating costs will be expected to increase as machinery deteriorates over time. This is the result of: Increased repair and maintenance costs Loss of production due to ‘down-time’ resulting from increased repair and maintenance time Lower quality and quantity of output * Asset replacement decisions The factors to be considered when making replacement decisions are as follows: Resale value – the extent to which old equipment can be traded in for new Taxation and investment incentives Inflation – both the general price level change, and relative movements in the prices of input and outputs * Asset replacement decisions Determining the optimum replacement period (cycle) will largely be influenced by: The capital cost/resale value of asset-the longer the period, the less frequently these will occur The annual operating costs of running the assets-the longer the period, the higher these will become. * 3 Capital rationing Fast forward Capital rationing may occur due to internal factors (soft capital rationing) or external factors (hard capital rationing) Capital rationing arises when an organization is restricted in the amount of funds available to initiate all worthwhile projects (i.e. projects that have a positive net present value). * 3 Capital rationing Key terms Capital rationing : a situation in which a company has a limited amount of capital to invest in potential project, such that the different possible investments need to be compared with one another in order to allocate the capital available most effectively. Capital rationing is a situation where a constraint (or budget ceiling) is placed on the total size of capital expenditures during a particular period. * 3 Capital rationing Capital rationing is