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Capital Investment Decisions Chapters 13 & 14

Capital Investment Decisions Chapters 13 & 14. ME 2027 Performance and Cost Analysis ME 2605 Cost Management and Control (for IMIM) Håkan Kullvén, KTH, 2007 Hakan.kullven@indek.kth.se. The investment process. Search for investment opportunities Initial screening Project authorizations

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Capital Investment Decisions Chapters 13 & 14

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  1. Capital Investment DecisionsChapters 13 & 14 ME 2027 Performance and Cost Analysis ME 2605 Cost Management and Control (for IMIM) Håkan Kullvén, KTH, 2007 Hakan.kullven@indek.kth.se

  2. The investment process • Search for investment opportunities • Initial screening • Project authorizations • Control during the installation stage • Post-completion audit

  3. Figures 13.1 page 495, and 13.2 page 497 The cost of capital WACC

  4. Example 13.1 page 497 Compounding

  5. Example 13.2 page 499 Discounting

  6. Example 13.2 page 499 Discounting

  7. Example 13.1 page 500. Project A Rate of return • Above is the internal rate of return • Accounting rate of return is average profit divided by average investment • Will be discussed in lecture about SBUs

  8. Example not in book Payback • Ignores time-value of money • Ignores cash-flow after the payback period

  9. Special considerations • What investment to choose? • If unequal lives • The effects of taxation • The effects of inflation • Risk-adjusted discount rates

  10. Next, we… are going to learn how to take a glance in the Crystal Ball, and make plans for the future. It is, in other words, time to take a look at the so-discussed topic of budgeting Chapter 15

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