CAPITAL EXPENDITURES INVESTMENT ANALYSIS

CAPITAL BUDGETING CAPITAL – relatively scarce nonhuman resources of a business enterprise BUDGETING – detailed and quantified planning that guides the future activities of the business toward the achievement of its service and profit objectives

REASONS FOR CAPITAL BUDGET CONTROL AND MONITORING 1. Substantial amount of money is invested 2. Commitment is over a longer period of time 3. Difficult to reverse the decision 4. Can spell success or failure for the company 5. Plans are made for the future which is uncertain to a certain degree

CLASSIFICATION OF CAPITAL INVESTMENTS 1. Investments for new business ventures 2. Investments for replacing present facilities 3. Investments for expansion 4. Investments on research and development 5. Investments for explorations

CAPEX CATEGORY Buildings & Infrastructure acquisitions Systems Development: Software and Hardware purchases Office Equipment purchases

BUILDING & INFRASTRUCTURE

METHODS OF EVALUATING CAPITAL INVESTMENTS A. QUANTITATIVE METHODS 1. Net Cash Inflow 2. Payback Period 3. Payback Reciprocal 4. Accounting Rate of Return B. TIME VALUE OF MONEY 1. Net Present Value 2. Profitability Index 3. Discounted Rate of Return

QUANTITATIVE METHODS NET CASH INFLOW  Excess of cash inflow over cash outflow PAYBACK PERIOD  Determines the length of time needed to recoup back cost of capital investment PAYBACK RECIPROCAL  Measures that portion of capital investment to be recouped in a period of one year RETURN ON INVESTMENT  Ratio of anticipated after tax earnings over the cost of the investment project

QUANTITATIVE METHODS NET CASH INFLOW Computed based on projected cash flow statement Should result in a positive cash inflow PAYBACK PERIOD Investment Annual Cash Inflow Should be less than the economic life of the asset PAYBACK RECIPROCAL ____1____ Payback Period Determines the amount of investment which will be recovered in one year

TIME VALUE OF MONEY NET PRESENT VALUE  Amount by which the present value of expected cash inflows exceeds the amount of original investment PROFITABILITY INDEX  Measures the ratio of the present value of cash inflows discounted at the minimum acceptable rate of return on the cost of the capital to present value of the original investment DISCOUNTED RATE OF RETURN  Rate of return computed on an investment by discounting the estimated future returns at an interest (discount) rate that equates the present value of returns with the capital investment

TIME VALUE OF MONEY EXCESS NET PRESENT VALUE Present Value of Cash Inflow less Investment Should indicate that the present value of returns is greater than the investment PROFITABILITY INDEX Total present value of cash inflow Investment Should be greater than 1 RATE OF RETURN Average Net Income After Tax Investment Should be greater than the prevailing market interest rate

SYSTEMS DEVELOPMENT SOFTWARE and HARDWARE ACQUISITION

QUANTITATIVE Savings in terms of reduced manpower Net Present Value Rate of Return on Investment Payback Period

QUALITATIVE Administrative Efficiency  Increased integrity/accuracy of data  Timeliness in report preparation Management Efficiency  Enhanced decision making capabilities  Improved management information  Improved workflow &/or processes

FINANCIAL MANAGEMENT INFORMATION SYSTEM I. CAPITAL EXPENDITURE A. Systems Software11,896,095 B. Hardware6,798,500 18,694,595 II. OPERATING EXPENSES (5 years) A. Maintenance5,286,480 B. Staffing & Training5,836,530 11,123,010 Contingencies3,591,642 TOTAL PROJECT COST33,409,247

QUANTITATIVE Internal Rate of Return23% Net Present Value  At 12%6,033,984  At 10%7,399,255 Payback Period  In years2.97  In months 35.68

QUALITATIVE Timely submission of management reports (receivables, membership fee accrual, etc) Improved corporate planning: simulation of data for strategic planning Enhanced decision making capabilities: profitability of products can be drilled down

OFFICE EQUIPMENT

LEASE - PURCHASE OPTION – PHOTOCOPYING MACHINE RELEVANT COST INFORMATION Purchase PriceP 45,000 Repairs & Maintenance Year 2P 5,000 Year 3P 10,000 Toner Drum ReplacementP 12,000 per year Depreciable Life3 years Rental RateP 0.75 per paper Average Volume3,000 copies per month Inflationary Adjustment10% per year

Year 1Year 2Year 3Total PURCHASE OPTION Depreciation15,000 45,000 Toner Drum Replacement12,00013,20014,52039,720 Repairs & Maintenance05,00010,00015,000 Total Operating Expenses27,00033,20039,52099,720

COMPARATIVE OPTION Year 1Year 2Year 3Total PURCHASE OPTION27,00033,20039,52099,720 LEASE RENTAL27,00029,70032,67089,370 COST SAVINGS03,5006,85010,350

CASE ANALYSIS: CT SCAN 128 slice …….