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BUS286 Corporate Finance

tag 0 Download 4 Pages / 753 Words tag 07-07-2021
  • Course Code: BUS286
  • University: Murdoch University
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  • Country: Australia


Capital expenditure process The capital expenditure process involves:

  • generation of investment proposals
  • evaluation and selection of those proposals
  • approval and control of capital expenditures
  • post-completion audit of investment projects

Approval and control of capital expenditures

  • The capital-expenditure budget (CEB) maps out the estimated future capital expenditure on new and continuing projects.
  • The CEB has the important role of setting administrative procedures to implement the project (project timetable, procedures for controlling costs).
  • Timing is important because project delays and cost over-runs will lower the NPV of a project, costing shareholder wealth

Highlights any cash flows that have deviated significantly from the budget and provides explanations where possible.

Benefits of conducting an audit:

  • may improve quality of investment decisions
  • provides information that will enable implementation ofimprovements in the project’s operating performance
  • may result in the re-evaluation and possible abandonment of an unsuccessful project.

Fundamental problems of ARR in project valuation:

  • Arbitrary measure which is based on accounting profit as opposed to cash flows. It therefore depends on some accounting decisions such as treatment of inventory and depreciation.
  • Ignores timing of the earnings stream. No time value ofmoney concepts are applied, as equal weight is given to accounting profits in each year of the project’s life.
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