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CAPITAL BUDGETING

VIEWS: 15 PAGES: 21

									  CAPITAL
EXPENDITURES

INVESTMENT
  ANALYSIS
       CAPITAL BUDGETING
   CAPITAL – relatively scarce resources
    of a business enterprise

   BUDGETING – detailed and quantified
    planning that guides the future activities
    of the business toward the achievement
    of its service and profit objectives
     REASONS FOR CAPITAL BUDGET
      CONTROL AND MONITORING

1.   Substantial amount of money is invested
2.   Commitment is over a longer period of time
3.   Difficult to reverse the decision
4.   Can spell success or failure for the company
5.   Plans are made for the future
      CLASSIFICATION OF
     CAPITAL INVESTMENTS
1.   New business ventures
2.   Replacing present facilities
3.   Expansion
4.   Research and development
5.   Explorations
      CAPEX CATEGORY
   Buildings & Infrastructure acquisitions

   Systems Development: Software and
    Hardware purchases

   Equipment purchases
   BUILDING &
INFRASTRUCTURE
 METHODS OF EVALUATING
  CAPITAL INVESTMENTS
A.    QUANTITATIVE METHODS
     1. Net Cash Inflow
     2. Payback Period
     3. Payback Reciprocal
     4. Accounting Rate of Return
B.    TIME VALUE OF MONEY
     1. Net Present Value
     2. Profitability Index
     3. Discounted Rate of Return
    QUANTITATIVE METHODS
   NET CASH INFLOW

   PAYBACK PERIOD

   PAYBACK RECIPROCAL

   RETURN ON INVESTMENT
  QUANTITATIVE METHODS

             Computed based on
 NET CASH                           Should result in a
             projected cash flow
 INFLOW                             positive cash inflow
                  statement

                Investment         Should be less than the
 PAYBACK
             Annual Cash Inflow    economic life of the
 PERIOD
                                   asset

                 ____1____         Determines the amount
PAYBACL                            of investment which
               Payback Period
RECIPROCAL                         will be recovered in
                                   one year
     TIME VALUE OF MONEY
   NET PRESENT VALUE


   PROFITABILITY INDEX

   DISCOUNTED RATE OF RETURN
      TIME VALUE OF MONEY

                                        Should indicate that
EXCESS NET       Present Value of Cash the present value of
PRESENT VALUE    Inflow less Investment returns is greater
                                        than the investment
                  Total present value
PROFITABILITY                             Should be greater
                    of cash inflow
INDEX                                     than 1
                      Investment
                     Average Net         Should be greater
RATE OF RETURN     Income After Tax      than the prevailing
                      Investment         market interest rate
  SYSTEMS
DEVELOPMENT

 SOFTWARE and
   HARDWARE
  ACQUISITION
       QUANTITATIVE

   Savings in terms of reduced manpower

   Net Present Value

   Rate of Return on Investment

   Payback Period
         QUALITATIVE

   Administrative Efficiency
     Increasedintegrity/accuracy of data
     Timeliness in report preparation

   Management Efficiency
     Enhanced decision making capabilities
     Improved management information
     Improved workflow &/or processes
FINANCIAL MANAGEMENT INFORMATION SYSTEM


I. CAPITAL EXPENDITURE
A. Systems Software                       11,896,095
B. Hardware                                6,798,500
                                          18,694,595


II. OPERATING EXPENSES (5 years)
A. Maintenance                             5,286,480
B. Staffing & Training                     5,836,530
                                          11,123,010


Contingencies                              3,591,642


TOTAL PROJECT COST                        33,409,247
           QUANTITATIVE

 Internal Rate of Return        23%
 Net Present Value
     At 12%                6,033,984
     At 10%                7,399,255
   Payback Period
     In years                   2.97
     In months                 35.68
                QUALITATIVE

 Timely submission of management reports
  (receivables, membership fee accrual, etc)
 Improved corporate planning: simulation of
  data for strategic planning
 Enhanced decision making capabilities:
  profitability of products can be drilled down
EQUIPMENT
LEASE - PURCHASE OPTION – PHOTOCOPYING MACHINE


RELEVANT COST INFORMATION
Purchase Price                     P 45,000
Repairs & Maintenance
  Year 2                            P 5,000
  Year 3                           P 10,000
Toner Drum Replacement         P 12,000 per year
Depreciable Life                    3 years
Rental Rate                     P 0.75 per paper
Average Volume               3,000 copies per month
Inflationary Adjustment          10% per year
                        Year 1   Year 2   Year 3   Total
PURCHASE OPTION
Depreciation            15,000   15,000   15,000   45,000

Toner Drum
Replacement             12,000   13,200   14,520   39,720
Repairs & Maintenance        0    5,000   10,000   15,000



Total Operating
Expenses                27,000   33,200   39,520   99,720
  COMPARATIVE
    OPTION
                  Year 1   Year 2   Year 3   Total


PURCHASE OPTION   27,000   33,200   39,520   99,720


LEASE RENTAL      27,000   29,700   32,670   89,370


COST SAVINGS           0    3,500    6,850   10,350

								
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