Capital Investment Decisions

Chapters 13 & 14ME 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

1. Search for investment opportunities

2. Initial screening

3. Project authorizations

4. Control during the installation stage

5. Post-completion audit

The cost of capitalFigures 13.1 page 495, and 13.2 page 497

CompoundingExample 13.1 page 497

DiscountingExample 13.2 page 499

DiscountingExample 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