Capital Investment Analysis & Standard Costing Techniques
Capital Investment Analysis/Capital Budgeting:
Learning Objectives: After studying this topic you should be able to: | | Define and explain capital investment analysis. | | | Evaluate capital investment proposals using average rate of return method, cash payback method, net present value method, and internal rate of return method. | | | Explain the advantages and disadvantages of various methods of evaluating capital investment proposals. | | | Explain the concept of the time value of money (present value and future value). | | | Contents: | Capital investment analysis is a process of planning, evaluating, and controlling investments in plant assets. It is also known as capital budgeting. Management should carefully develop and implement capital investment analysis because it involves long term investment in assets that effects operations for many years. Capital investment decisions are very important because they involve long term commitment of funds. An enterprise has to meet obligations to creditors and provide dividends to stockholder so these investments must earn a sufficient rate of return.Employees at all levels should be encouraged to submit their proposals for capital investments. Serious considerations should be given to all reasonable proposals. Management should carefully identify the effects of economic implications that are expected from these proposals. Employees whose proposals are accepted for implementation should be rewarded by the the enterprise. |
Methods for the Evaluation of Capital Investment Proposals: |
Following four methods are usually used for the evaluation of capital investment proposals: 1. The average rate of return method. 2. The payback period method (also known as cash payback period method). 3. The net present value method. 4. The internal rate of return method.Method 1 and 2 are the methods that do not use the present values. Method 3 and 4 use the present values. So these
Learning Objectives: After studying this topic you should be able to: | | Define and explain capital investment analysis. | | | Evaluate capital investment proposals using average rate of return method, cash payback method, net present value method, and internal rate of return method. | | | Explain the advantages and disadvantages of various methods of evaluating capital investment proposals. | | | Explain the concept of the time value of money (present value and future value). | | | Contents: | Capital investment analysis is a process of planning, evaluating, and controlling investments in plant assets. It is also known as capital budgeting. Management should carefully develop and implement capital investment analysis because it involves long term investment in assets that effects operations for many years. Capital investment decisions are very important because they involve long term commitment of funds. An enterprise has to meet obligations to creditors and provide dividends to stockholder so these investments must earn a sufficient rate of return.Employees at all levels should be encouraged to submit their proposals for capital investments. Serious considerations should be given to all reasonable proposals. Management should carefully identify the effects of economic implications that are expected from these proposals. Employees whose proposals are accepted for implementation should be rewarded by the the enterprise. |
Methods for the Evaluation of Capital Investment Proposals: |
Following four methods are usually used for the evaluation of capital investment proposals: 1. The average rate of return method. 2. The payback period method (also known as cash payback period method). 3. The net present value method. 4. The internal rate of return method.Method 1 and 2 are the methods that do not use the present values. Method 3 and 4 use the present values. So these