@ 2012, cengage learning capital investment analysis lo 4 – factors that complicate capital...
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@ 2012, Cengage Learning
Capital Investment Analysis
LO 4 – Factors That Complicate Capital Analysis
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Factors That Complicate Capital Investment Analysis
Income tax Proposals with unequal lives Leasing versus purchasing Uncertainty Changes in price levels Qualitative factors
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For federal income tax purposes, depreciation on fixed assets can be much shorter than the actual useful lives. Also, depreciation for tax purposes often differs from depreciation for financial statement purposes.
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Unequal Proposal Lives
Assume that a company is considering purchasing a new truck or a new computer network. The data for each proposal are shown below.
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Unequal Proposal LivesLO 4LO 4
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Unequal Proposal Lives
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Lease versus Capital InvestmentSome advantages of leasing a fixed asset
include the following: The company has use of the fixed asset without
spending large amounts of cash to purchase the asset.
The company eliminates the risk of owning an obsolete asset.
The company may deduct the annual lease payments for income tax purposes.
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Lease versus Capital InvestmentOne disadvantage of leasing a fixed asset is
the following: The leasing arrangement normally is more costly
than the outright purchase of the asset.
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Uncertainty
All capital investment analyses rely on factors that are uncertain. Estimates of revenue and expenses The amount of cash flows
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Changes in Price Levels
General price levels often increase in a rapidly growing economy, which is called inflation.
Price levels may change for foreign investments. This occurs as currency exchange rates change. Currency exchange rates are the rates at which currency in another country can be exchanged for U.S. dollars.
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Qualitative Considerations
Improvements that increase quality and competitiveness are difficult to quantify. The following qualitative factors are important considerations.1. Product quality
2. Manufacturing flexibility
3. Employee morale
4. Manufacturing productivity
5. Market (strategic) opportunities
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