The definition, identification, and measurement of cash flows relevant to project evaluation.A relevant cash flow is one which will change as a direct result of the decision about a project.A relevant cash flow is one which will change as a direct result of the decision about a project.
The topic discussed in this chapter is making capital investment decisions. In this chapter, you will learn: Understand how to determine the relevant cash flows for a proposed investment, understand how to analyse a project’s projected cash flows, understand how to evaluate an estimated NPV.
After studying chapter 12, you should be able to: Define “capital budgeting” and identify the steps involved in the capital budgeting process, explain the procedure used to generate longterm project proposals within the firm, justify why cash, not income, flows are the most relevant to capital budgeting decisions,...
Chapter 6 - The application of project evaluation methods. After studying this chapter you will be able to: Explain the principles used in estimating project cash flows, compare mutually exclusive projects that have different lives, determine when to retire (abandon) or replace assets,...
Other Comprehensive Income
Statement of Financial Accounting Standards No. 130 Comprehensive income includes traditional net income and changes in equity from nonowner transactions.
1. Changes in the market value of securities available for sale (described in Chapter 12). 2. Gains, losses, and amendment costs for pensions and other postretirement plans (described in Chapter 17). 3. When a derivative is designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in...
In this chapter, risk is accounted for by (1) applying a discount rate commensurate with the riskiness of the cash flows, and (2), by using a certainty equivalent factor
In chapter 8, risk is accounted for by evaluating the project using sensitivity and breakeven analysis.
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Chapter 12 - Capital budgeting and estimating cash flows. After studying chapter 12, you should be able to: Define “capital budgeting” and identify the steps involved in the capital budgeting process, explain the procedure used to generate longterm project proposals within the firm, justify why cash, not income, flows are the most relevant to capital budgeting decisions,...
In this chapter, the learning objectives are: Explain the strategic role of capital-investment analysis, describe how accountants can add value to the capital- budgeting process, provide a general model for determining relevant cash flows associated with capital-expenditure projects, apply discounted cash flow (DCF) decision models for capital-budgeting purposes,…
Corporate financial managers continually invest funds in assets, and these assets produce income and cash flows that the firm can then either reinvest in more assets or distribute to the owners
of the firm. Capital investment refers to the firm’s investment in assets, and these investments may be either short term or long term in nature. Capital budgeting decisions involve the long-term commitment
of a firm’s scarce resources in capital investments. When such a decision is made, the firm is committed to a current and possibly future outlay of funds....
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This book explains the ﬁnancial appraisal of capital budgeting projects. The coverage extends from the development of basic concepts, principles and techniques to the application of them in increasingly complex and real-world situations. Identiﬁcation and estimation (including forecasting) of cash ﬂows, project appraisal formulae and the application of net present value (NPV), internal rate of return (IRR) and other project evaluation criteria are illustrated with a variety of calculation examples.
Financing new equipment -- from computers to phone systems to capital equipment and other gear you need to run your company -- is a major issue for many small business owners. Leasing, instead of purchasing, can be a cost-effective option, particularly if you don't have the cash on hand, but need the equipment.
In fact, you might want to consider leasing even if you do have the cash to invest. By leasing, you might find that you can regulate your cash flow more effectively, because you have predictable, regular monthly installments as opposed to a single lump sum payment. Plus, leasing......
This book has been written for business owners and managers
who want to refine the accounting and financial operations of
their companies. It provides detailed information about how to run
these operations, track cash flows, conduct analyses, analyze key
financial information, create a corporate risk management strategy,
and manage tax liabilities—in short, all of the key accounting and
financial information required to operate a small business.
Describe the purpose of the balance sheet and understand its usefulness and limitations.
The Balance Sheet
The purpose of the balance sheet is to report a company’s financial position on a particular date.
Limitations: The balance sheet does not portray the market value of the entity as a going concern nor its liquidation value. p Resources such as employee skills and reputation are not recorded in the balance sheet.
Usefulness: p The balance sheet describes many of the resources a company has available for generating future cash flows.
Private investors may need to isolate their cash flows to debt , usually only a single mortgage, from the cash flows to equity, usually their savings. Private investors may need this information to record any shortfall between rent received and loan interest, for personal income tax measurement.
Although we use the term “cash flow”, the dollar values used might not be the same as the actual cash amounts.
In some instances, actual ‘market prices’ do not reflect the true
value of the project’s input or output.
Once we have determined the relevant cash-flow information necessary to make capital budgeting decisions, we need to evaluate the attractiveness of the various investment proposals under consideration. The investment decision will be to either accept or reject each proposal. In this chapter we study alternative methods of project evaluation and selection. In addition, we address some of the potential difficulties encountered in trying to implement these methods.
After studying chapter 14, you should be able to: Define the “riskiness” of a capital investment project; understand how cash-flow riskiness for a particular period is measured, including the concepts of expected value, standard deviation, and coefficient of variation; describe methods for assessing total project risk, including a probability approach and a simulation approach.
Chapter 11 - Capital budgeting decisions. The term capital budgeting is used to describe how managers plan significant cash outlays on projects that have long-term implications, such as the purchase of new equipment and the introduction of new products. This chapter describes several tools that can be used by managers to help make these types of investment decisions.