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capital asset
operational asset used for a long period of time
capital investment
acquisition of capital asset
capital budgeting
the process of planning to invest in long term assets in a way that returns the most profit
payback
measures the amount of time it takes to recover the cost of intital investment in terms of net cash inflows
equal cash flows formula
initial investment/amt of annual cash inflows
advantages of payback
easy
good for short term investments
disadvantages for payback
doesnt consider time value of money
doesnt consider income after break even
Accounting rate of return (ARR)
a capital investment analysis method that measures the overall profitability of the investment
advantages of ARR
considers overall profitability
disadvantages of ARR
uses accrual accounting
doesnt consider time value of money
decision rate
does the return meet expecations
net present value (NPV)
a capital investment analysis method that measures the net difference between the present value of investments net cash inflows and investment cost
discount rate
managements minimum desired rate of return on investment
if NPV is 0 or above…
accept
if NPV is below 0…
reject
profitability index (PI)
computes the number of dollar returned for each dollar invested
if PI index is one or greater…
accept (NPV is positive)
if PI index is less than one…
reject (NPV is negative)
centralized company
major planning and control decisions made by top managers
decentralized company
a company is divided into segments, each segment manager makes planning and control decisions
cost center
manager in a cost center is only responsible for costs (evaluate based on if they acheive standards)
revenue center
manager is evaluated by generating revenue
profit center
manager is in charge of managing both costs and generating revenue
investment center
manager is responsible got profit and capital decision
performance evaluation system
provides top managment with a framework for maintaining control over entire system
lag indicators are based on…
past performace
lead indicators are based on…
projections of the future
operational performance measure
non-financial performance measures to evaluate efficiency and effectiveness of the company
customer satisfaction
employee satisfaction and retention
balanced score card
performance evaluation system that requires management to consider both financial and operational performance
Different perspectives: financial
how do we look to investors and creditors (increase profit, productivity and growth)
different perspectives: customer
improve value to customer (price, quality, service)
different perspective: internal business
problems with the product (defects), new products to market, number of products sold
different perspectives: learning and growing
returning skilled employees, positive culture, training for employees, employee satisfaction
transfer pricing
amount of goods when the transaction happens between different segments of the company
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