Accounting 6350'015T Week 1

1
Accounting 6350.015T -- Week 1

• Gary Spraakman
• Course outline
• httpwww.mcgrawhill.ca/college
• /hiltoncost
• Preparation for classes
• Determination of final grade
• Lecture Capital Budgeting,
  
  Chapter 14

2
Time Value of Money

• 1t0 does not equal 1t1 1t2 1t to infinity
• 1t0 1(1r)t1 /(1r) 1 (1 r)2t2/(1r)2

3
Common Share Value Parallel

• Efficient market hypothesis
• Pt0 dt1/(1r) dt2/(1r)2
• NPV CFt0 CFt1/(1r) CFt2/(1r)2
• CF NI CCA /- Investment /- D-E

4
Tools for Analyzing Capital Projects

• Net present value (NPV)
• Internal rate of return (IRR)
• Accounting rate of return
• Payback

5
Mechanics for NPV and IRR

• Cash flows
• Revenues
• Costs
• Capital investment
• Taxes
• Discount rate
• Future oriented

6
Examples of Cash Flows

• Net income
• CCA
• Dividends
• Investments in working capital
• Investments in fixed assets
• Acquisition of debt
• Acquisition of equity
• Prepaids/Accruals

7
Conceptualizing Cash Flows

• Cash coming to or leaving the organization
• Not necessarily the same as income or expenses
• Different than accrual accounting
• See overheads

8
Income Tax Effects

• Income tax is a cash outflow
• Capital cost allowance (CCA) is a non-cash
  expense
• As an expense, CCA reduces income tax
• CCA is like a cash inflow
• The total impact of CCA can be calculated -- tax
  shield
• See overhead

9
The Tax Shield Calculation

• Present value of tax shield
• Inv x T x CCA 2 r
• CCA r 2(1r)
• - See overhead

10
Three Examples

• See overheads

11
Other Capital Budgeting Issues

• A political process
• Bower
• Mintzberg
• Cost of capital, discount rate
• Uncertainty, risk
• Sensitivity analysis
• Financial not physical
• Enterprise Resource Planning (ERP) systems

12
Class Discussion

• HMSS 14.51