Capital Investment Decisions Chapters 13 & 14 ME 2027 Performance and Cost Analysis ME 2605 Cost Management and Control (for IMIM) Håkan Kullvén, KTH,

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Capital Investment Decisions Chapters 13 & 14 ME 2027 Performance and Cost Analysis ME 2605 Cost Management and Control (for IMIM) Håkan Kullvén, KTH, 2007

The investment process 1.Search for investment opportunities 2.Initial screening 3.Project authorizations 4.Control during the installation stage 5.Post-completion audit

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

Compounding Example 13.1 page 497

Discounting Example 13.2 page 499

Discounting Example 13.2 page 499

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 Example 13.1 page 500. Project A

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

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

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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