Capital Investment Decisions Lecture Slides

2983 WordsFeb 21, 201512 Pages
Capital investment decisions: BU5026 BU5043 BU5049 Dr Ndubuisi C Anomelechi 1 Budgeting and planning for Capital investments • Generally referred to as o Capital budgeting decisions o Capital investment decisions o Capital expenditure (CAPEX) decisions • Planning for significant financial outlays • Projects with long-term implications o New equipment purchase o Introduction of new products. 2 1 Typical Capital Budgeting Decisions Plant expansion Equipment selection Equipment replacement Lease or buy Cost reduction 3 Two broad categories 1. Screening decisions Assessing whether a proposed project meets some determined standard of acceptance 2. Preference decisions Selecting from among several competing alternative…show more content…
Provision of the service would require investment in a machine that would cost £100,000, payable immediately. Sales of the service would take place throughout the next five years. At the end of that time, it is estimated that the machine could be sold for £20,000 Inflows and outflows from sales of the service would be expected to be as follows: Time Immediately 1 year 's time 2 year 's time 3 year 's time 4 year 's time 5 year 's time 5 year 's time Cost of machine Operating profit before depreciation Operating profit before depreciation Operating profit before depreciation Operating profit before depreciation Operating profit before depreciation Disposal proceeds from the machine £000 (100) 20 40 60 60 20 20 17 Measure 1: Accounting Rate of Return • Quite popular but profit not cash based • An investment decision is based on: o Is the average profit per annum divided by the average capital employed greater than the target return on capital for the company? o i.e. project return > company return • Ignores monetary timing, tends to overstate the case for the investment 18 9 ARR Average annual operating profit x 100% = Average investment to earn that profit Average
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