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Chapter 13 - Strategic investment decisions. In this chapter students will be able to: Apply alternative methods in analyzing strategic investment decisions, identify additional issues to be considered for strategic investment decisions, explain how income taxes affect strategic investment decision cash flows, . | Lecture Cost management Measuring monitoring and motivating performance 3rd edition Chapter 13 COST MANAGEMENT Measuring Monitoring and Motivating Performance Third Canadian Edition ELDENBURG WOLCOTT CHEN COOK Chapter 13 Strategic Investment Decisions Learning Objectives LO1 Explain how strategic investment decisions are made LO2 Identify relevant cash flows and perform net present value NPV analysis for capital investment decisions LO3 Identify the uncertainties of NVP analysis LO4 Apply alternative methods in analyzing strategic investment decisions LO5 Identify additional issues to be considered for strategic investment decisions LO6 Explain how income taxes affect strategic investment decision cash flows LO7 Explain how real and nominal methods are used to address inflation in an NPV analysis LO1 Explain how strategic investment decisions are made Capital Budgeting Strategic investment decisions have long-term effects. Capital budgeting is a process that managers use when they choose among strategic investment opportunities. Capital budgeting decisions affect cash flows in future years which introduces an important concept the time value of money which refers to the idea that a dollar received today is worth more than a dollar received in the future. Identifying and Prioritizing Investment Opportunities Relevant Cash Flows Relevant cash flows must arise in the future and differ among decision alternatives possible courses of action At the beginning of the project at time 0 the company faces initial cash outflows During years 1 through n the life of the project there are annual incremental operating cash flows for the project Any terminal cash flows appear at the end of the project s life time n Relevant Cash Flows Examples of relevant cash outflows include Initial investment outlay Future operating costs Project closing and cleanup costs Examples of relevant cash inflows include Future revenues Decreased operating costs Salvage value of assets at project s .
