Slide 1 ___________________________________ 8.6 Othe r Capital - PDF document

Slide 1 ___________________________________ 8.6 Othe r Capital Budge ting Appr oa c he s Othe r Ca pita l budg e ting me thods ___________________________________ o Inte r nal r ate of r e tur n o Paybac k pe r iod ___________________________________ o Simple rate of r e turn ___________________________________ ___________________________________ ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 2 ___________________________________ Inte rna l Ra te of Re turn o Simply the yie ld on a pr oje c t ___________________________________ o Re turn ra te on a proje c t whe n ne t pr e se nt va lue is ze ro ___________________________________ o Whe re disc ounte d inflows e qua l disc ounte d outflows ___________________________________ ___________________________________ ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 3 ___________________________________ Inte rna l Ra te of Re turn Ca lc ula ting the Inte rna l Ra te of ___________________________________ Re turn o F ina nc ial c alc ulator ___________________________________ o Spr e adshe e t softwa re o By ha nd – not re c omme nde d ___________________________________ ___________________________________ ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________

Slide 4 ___________________________________ Pa yba c k Pe riod Me thod o Pa yba c k pe riod is the time ___________________________________ re quire d to r e c oup the initia l inve stme nt fr om c a sh r e c e ipts o Not a true me a sure of profita bility ___________________________________ o Doe s not ta ke into a c c ount future c a sh flows ___________________________________ o Pa yba c k Pe riod Me thod E qua tion ___________________________________ Inve stme nt Require d Pa yba c k Pe riod Me thod = Ne t Annua l Ca sh Inflows ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 5 ___________________________________ Payba c k Pe riod Me thod Exa mple Cosmos Inte r na tional ha s de c ide d to upda te ___________________________________ e quipme nt. Upon r e vie w of the spe c s on a numbe r of bids, two bids have be e n ide ntifie d as having the ne c e ssary attr ibute s to re plac e the antiqua te d e quipme nt. ___________________________________ o Bid 172a is ba r e bone s. Howe ve r , be c a use this e quipme nt will not r e quir e c onstant r e pa ir a nd ma inte na nc e it is c a lc ula te d tha t pr oduc tivity should inc r e a se by 25% ___________________________________ o Bid 274b ha s some time saving fe atur e s but is mor e e xpe nsive COSMOS I CO INTL ___________________________________ ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 6 ___________________________________ Payba c k Pe riod Me thod Exa mple Inve stme nt ___________________________________ Bid 172a Bid 274b Inve stme nt r e quir e d $175,000 $258,000 ___________________________________ Ne t c ash inflows $43,750 $52,500 Payba c k pe r iod in yr s 4.0 yr s 4.9 yr s ___________________________________ Base d upon the paybac k me thod the bare bone s mode l is the be st ___________________________________ de c ision. It will pay for itse lf almost one ye a r e a r lie r than the fanc y mode l. ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________

Slide 7 ___________________________________ Simple Ra te of Re turn o Doe s not involve disc ounting c a sh ___________________________________ flows a nd thus doe s not c onside r the time va lue of mone y ___________________________________ o AKA: o Ac c ounting r ate of re tur n ___________________________________ o Una djuste d r a te of re tur n o F oc us on inc re me nta l ne t ope ra ting inc ome ___________________________________ o Inc r e me ntal r e ve nue s – inc r e me nta l e xpe nse s ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 8 ___________________________________ Simple Ra te of Re turn T wo e qua tion va r ia tions: ___________________________________ Annua l Annua l Inc reme nta l Inc r e me nta l E xpe nse s inc luding Re ve nue s De pre c ia tion Simple Ra te of Re turn = ___________________________________ Initia l Inve stme nt ___________________________________ Annua l Annua l Cost De pr e c ia tion on Sa ving s Ne w E quipme nt Simple R a te of Re tur n = ___________________________________ Initia l Inve stme nt ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 9 ___________________________________ Simple Ra te of Re turn E xa mple 1 Sc ott Inc . ma ke s widg e ts a nd is c onside ring the ___________________________________ a ddition of a ne w proc e ssing line . T he proc e ssing line would inc re a se r e ve nue by $650,000 with a ssoc iate d e xpe nse s of $475,000. T he ne w ___________________________________ proc e ssing line would c ost $900,000 a nd ha ve a use ful life of 10 ye ar s with no sa lvage value ___________________________________ ($475,000 + $85,000 $650,000 de pre c ia tion) Simple Ra te of Re turn = ___________________________________ $900,000 = 10% (850,000 – 0)/ 10 Assume str a ig ht line depre c ia tion ___________________________________ (Cost – sa lva g e va lue ) / useful life 2005 K D Ha the wa y-Dia l ___________________________________

Slide 10 ___________________________________ Simple Ra te of Re turn E xa mple 2 Da lla s John Corp ha s be g un to re vie w a utoma ting ___________________________________ the pac kag ing division of the ir wa re house . Curr e ntly a ll Doodads are pac ke d for shipping by ha nd. T he ne w e quipme nt c ould save the c ompany $79,000 e ac h ye ar in labor c osts. T he ne w e quipme nt c osts ___________________________________ $360,000. It ha s a use ful life of 15 ye a rs with no salva ge va lue . ___________________________________ $80,000 $20,000 Simple R a te of Re tur n = ___________________________________ $300,000 (300,000 – 0)/ 15 = 20.0% Assume str a ig ht line depre c ia tion ___________________________________ (Cost – sa lva g e va lue ) / useful life 2005 K D Ha the wa y-Dia l ___________________________________