CostAccountingSeventeenthEdition,GlobalEditionChapter22CapitalBudgetingandCostAnalysisCopyright?2021PearsonEducationLtd.

LearningObjectives(1of2)22.1Understandthefivestagesofcapitalbudgetingforaproject22.2Useandevaluatethetwomaindiscountedcashflow(DCF)methods:thenetpresentvalue(NPV)methodandtheinternalrate-of-return(IRR)method22.3Useandevaluatethepaybackanddiscountedpaybackmethods22.4Useandevaluatetheaccrualaccountingrate-of-return(AARR)method

LearningObjectives(2of2)22.5Identifyrelevantcashinflowsandoutflowsforcapitalbudgetingdecisions22.6Understandissuesinvolvedinimplementingcapitalbudgetingdecisionsandevaluatingmanagerialperformance22.7Explainhowmanagerscanusecapitalbudgetingtoachievetheirfirms’strategicgoals

CapitalBudgeting—IntroductionTopexecutiveshavetofigureouthowandwhentobestallocatethefirm’sfinancialresourcesamongalternativeopportunitiestocreatefuturevalueforthecompany.Becauseitishardtoknowwhatthefutureholdsandhowmuchprojectswillultimatelycost,thiscanbeachallengingtask,butitisonethatmanagersmustconstantlyconfront.Thischapterexplainsthedifferentmethodsorganizationsusetogetthe“biggestbangfortheirbuck”intermsoftheprojectstheyinvestinorundertake.

CapitalBudgeting—TerminologyCapitalbudgetingistheprocessofmakinglong-runplanningdecisionsforinvestmentsinprojects.Inmuchofaccounting,incomeiscalculatedonaperiod-by-periodbasis.Inchoosinginvestments,managersmakeselectionsamongmultipleprojects,eachofwhichmayspanseveralperiods.

TwoDifferent,IntersectingDimensionsofCapitalBudgetCostAnalysisHorizontallyacrossastheprojectdimensionVerticallyupwardastheaccounting-perioddimensionTomakecapitalbudgetingdecisions,managersanalyzeeachprojectbyconsideringallthelife-spancashflowsfromitsinitialinvestmentth