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ACTG 4400 Chapter Notes - Chapter 11: Financial Statement, Corporate Social Responsibility, Capital Cost Allowance

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School
York University
Department
Accounting
Course
ACTG 4400
Professor
Sandy Qu

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Document Summary

Capital budgeting: process of making long run planning decisions for investments in projects. Managers often make selection from among group of projects that may span several periods. Analyzes each project by considering all of the cash flows in life of investment. Is a decision-making and control tool that spans multiple years: from initial expenditures through termination of project. Involves estimating all potential revenues and any costs that will be incurred in project life cycle. There are 2 dimensions of cost analysis for capital budgeting: project by project dimension: one project spans multiple accounting periods, period by period dimension: one period contains multiple projects. The measures of investment performance (long-term) differ from those of operating performance (short term) Focus of investment performance evaluation should be on how wee the strategy is being implemented rather than short term contribution to profitability basis. Best measures will isolate effects due to good management from those due to bad luck (uncontrollable risks)

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Related Questions

For the following exercise, complete the calculations below.Evaluate different capital investment appraisal techniques bycompleting the calculations shown below:

Bongo Ltd. is considering the selection of one of two mutuallyexclusive projects. Both would involve purchasing machinery with anestimated useful life of 5 years.

Project 1 would generate annual cash flows (receipts lesspayments) of £200,000; the machinery would cost £556,000 with ascrap value of £56,000.

Project 2 would generate cash flows of £500,000 per annum; themachinery would cost £1,616,000 with a scrap value of £301,000.

Bongo uses straight-line depreciation. Its cost of capital is15% per annum.

Assume that all cash flows arise on the anniversaries of theinitial outlay, that there are no price changes over the projectlives, and that accepting either project will have no impact onworking capital requirements.

Assess the choice using the following methods by completing thecalculations shown below:

ARR

NPV

IRR

Payback period

Calculate the missing answers:

Project 1 Project 2
ARR (seeworkings) 33% ???
NPV (£’000) ??? 210
IRR 25% ???
Payback Period(yrs) ??? 3.2

ARR workings (Project 1)

Cash flows 200
Less: depreciation (see below) 100
Accounting profits 100

These profits are the same each year in this question.

Annual depreciation (Cost – SV) / 5

(556,000 – 56,000) / 5 100

Average NBV of investments

(556 + 56) /2 306
ARR 33%

Be sure to demonstrate your workings.

Bongo Ltd. is considering the selection of one of two mutuallyexclusive projects. Both would involve purchasing machinery with anestimated useful life of 5 years.

Project 1 would generate annual cash flows (receipts lesspayments) of £200,000; the machinery would cost £556,000 with ascrap value of £56,000.

Project 2 would generate cash flows of £500,000 per annum; themachinery would cost £1,616,000 with a scrap value of £301,000.

Bongo uses straight-line depreciation. Its cost of capital is15% per annum.

Assume that all cash flows arise on the anniversaries of theinitial outlay, that there are no price changes over the projectlives, and that accepting either project will have no impact onworking capital requirements.

Assess the choice using the following methods by completing thecalculations shown below:

ARR

NPV

IRR

Payback period

Calculate the missing answers:

Project 1 Project 2
ARR (seeworkings) 33% ???
NPV (£’000) ??? 210
IRR 25% ???
Payback Period(yrs) ??? 3.2

ARR workings (Project 1)

Cash flows 200
Less: depreciation (see below) 100
Accounting profits 100

These profits are the same each year in this question.

Annual depreciation (Cost – SV) / 5

(556,000 – 56,000) / 5 100

Average NBV of investments

(556 + 56) /2 306
ARR 33%

Be sure to demonstrate your workings.

FILL IN THE CORRECT TERMINOLOGIES IN THE BLANK SPACES
_____ 1. a. A method of internal (managerial accounting) reporting that emphasizes the distinction between variable and fixed costs.
_____ 2. b. A discounted cash flow approach to capital budgeting that computes the present value of all future cash flows.
_____ 3. c. Determination of the maximum cost a company can spend to make a product given a set volume, selling price and desired operating profit.
_____ 4. d. An analysis of the additional costs and benefits of a proposed alternative compared with the current situation.
_____ 5. e. A historical cost that the company has already incurred which is irrelevant to the decision making process.
_____ 6. f. Costs that will not continue if an ongoing operation is changed or deleted.
_____ 7. g. An already owned production site that is not currently in use.
_____ 8. h. The maximum available benefit foregone by using a resource for a particular purpose.
_____ 9. i. The predicted future costs and revenues that will differ among alternative courses of action.
_____ 10. J. The time it will take to recoup, in the form of cash inflows from operations, the initial dollars invested in a project
_____ 11. k. Those costs of facilities and services that are shared by users
_____ 12. l. The juncture of manufacturing where separate products developed in the same process become individually identifiable.
_____ 13. m. A costing approach that considers all indirect manufacturing costs (both variable and fixed) to be product (inventoriable) costs.
_____ 14. n. Purchasing products or services from a supplier outside the company.
_____ 15. o. Capital budgeting models that focus on cash inflows and ouflows while taking into account the time value of money
_____ 16. p. Calculation of a selling price sufficient to cover the cost of producing a product as well as desired operating income
_____ 17 q. The long-term planning for investment commitments with returns spread over multiple years
_____ 18. r. A decision process that compares the differential revenues and costs of alternatives.
_____ 19. s. Costs that will continue even if a company discontinues one of its current operations
_____ 20. t. The increase in expected average annual operating income divided by the original required investment