1. Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

2. Use with Business Accounting and Finance
As well as expenditure on fixed and variable costs managers must make decisions about spending on capital items. Capital expenditure is expenditure on items such as fixed assets and investments in other businesses. It involves appraisal of profits and cash flow generated over more than one accounting period.
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

3. Use with Business Accounting and Finance
Capital expenditure must fit into the framework of the business’s strategy and objectives
Many businesses in practice subject capital expenditure, even on small items, to scrutiny
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

4. Use with Business Accounting and Finance
Four principal methods will be examined:
Accounting rate of return (ARR)
Payback
Net present value (NPV)
Internal rate of return (IRR)
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

5. Use with Business Accounting and Finance
Example: Proctor Hedges Limited
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

6. Use with Business Accounting and Finance
Maximum capacity:
Machine A units per year
Machine B units per year
Demand:
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

7. Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

8. Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

9. Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

10. Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

11. Use with Business Accounting and Finance
Machine A
Machine B
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

12. Use with Business Accounting and Finance
Machine A
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

13. Use with Business Accounting and Finance
Machine A
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

14. Use with Business Accounting and Finance
Machine B
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

15. Use with Business Accounting and Finance
Machine B
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

16. Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

17. Use with Business Accounting and Finance
What is the discount factor for £1 at the end of year 3, which has been invested since Time 0 at a constant rate of 4%?
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

18. Use with Business Accounting and Finance
So, £0.88p is the present value of £1 at the end of year 3 using a discount rate of 4%
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

19. Use with Business Accounting and Finance
Machine A
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

20. Use with Business Accounting and Finance
Machine B
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

21. Use with Business Accounting and Finance
Machine A: calculate NPV at various rates
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

22. Use with Business Accounting and Finance
Machine A
The internal rate of return lies somewhere between 18% and 20%
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

23. Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

24. Use with Business Accounting and Finance
Machine A: linear interpolation
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

25. Use with Business Accounting and Finance
Machine A: Linear interpolation
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

26. Use with Business Accounting and Finance
Machine A: linear interpolation
IRR is 18% % = 19.54%
NB: IRR for Machine B is 17.68%
Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

27. Use with Business Accounting and Finance
Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning