ACC3200 Chap.12 Capital Expenditure Decisions
Capital Expenditure Decisions
Evaluate long-term cash flows with discounted and non-discounted methods, then audit outcomes.
What this chapter covers
- 01
NPV and IRR
- 02
Payback and accounting return
- 03
Post-completion audits
Worked example · free
Discount a three-year proposal
- 2Place initial, operating and terminal cash flows on a timeline.
- 2Discount each flow and reconcile net present value.
- 2Compare supplementary measures and recommend an implementation checkpoint.
Key terms
- NPV and IRR
- Present-value and break-even-rate methods based on incremental project cash flows.
- Payback and accounting return
- Supplementary liquidity and accounting-profit measures that do not quantify value directly.
- Post-completion audits
- Reviews comparing realised outcomes with assumptions recorded at approval.
Capital Expenditure Decisions FAQ
Why is NPV preferred to payback?
Net present value recognises time value and all included project cash flows. Payback omits later benefits and, unless specifically discounted, ignores when cash arrives before recovery.
Exam move
Lay out capital-expenditure analysis on a dated cash-flow timeline. Place the initial investment at time zero, operating inflows and outflows in their expected periods, working-capital movements when they occur and terminal proceeds at the end. Separate cash flows from accounting profit. Depreciation affects accounting return and may affect tax only when the case provides that framework; it is not itself a cash payment.
Build net present value by discounting each incremental cash flow at the required return and summing present values less the initial outflow. Check the exponent against the date and keep inflows and outflows signed consistently. A positive NPV means the project adds value under the stated cash flows and discount rate. Reconcile the printed answer to the individual present values before writing the recommendation.
Interpret internal rate of return as the discount rate that makes NPV zero. Compare it with the required return, while recognising that unusual cash-flow patterns or mutually exclusive projects can make IRR rankings problematic. NPV measures value added in dollars and is the primary rule when ranking conflicts arise. Do not average annual returns or confuse the IRR percentage with accounting return.
Calculate payback as the time required to recover the initial cash outlay from cumulative undiscounted cash inflows unless discounted payback is explicitly requested. Identify the last full period before recovery and the fraction of the next period needed. Payback communicates liquidity exposure but ignores time value and cash flows after the cutoff. Use it as supplementary evidence, not a replacement for NPV.
Accounting rate of return uses accounting profit and an investment base, so state whether the denominator is initial or average investment. Its inputs differ from cash-flow methods, and it does not directly measure value creation. Explain why a project can look different under ARR, payback and NPV. The disagreement often reflects timing, scale or treatment of later cash flows rather than arithmetic error.
Test uncertainty one driver at a time. Vary initial cost, annual inflow, terminal value or discount rate and find the value at which NPV becomes zero. Compare the break-even point with commercial evidence. Add a coherent downside scenario when variables move together, but avoid combining unrelated worst cases. Keep a record of which assumptions are measured, forecast or managerial judgements.
Consider strategic and implementation factors without inventing monetary values. Capability, safety, option value or stakeholder effect may matter even when a defensible cash estimate is unavailable. Describe the mechanism and decision condition separately. A qualitative benefit should not be inserted as a balancing cash flow simply to produce a desired NPV.
Practise a three-year original project and audit it from the answer back to the timeline. The six-mark allocation in the chapter example is an AskSia revision device, not a Monash-published rubric. Conclude with accept, reject, stage or redesign; identify the owner and post-completion review date; and state the adverse observation that would halt further commitment or require the forecast to be rebuilt.
Build a project timeline containing an initial outlay, three annual net inflows, working-capital recovery and terminal proceeds. Compute NPV, reconcile every present value and calculate payback as supplementary liquidity evidence. Change the weakest cash-flow assumption until NPV reaches zero and compare that break-even point with commercial evidence.
Write an approval recommendation containing staged expenditure, a benefits owner and a post-completion review. When realised cash flows cross the adverse threshold, state whether the remaining investment should pause, be redesigned or be abandoned. The exercise connects valuation with implementation control. Archive the original dated cash-flow assumptions before approval and compare them with realised outcomes later.
This protects the post-completion review from hindsight and helps future proposals improve volume, margin, timing and terminal-value estimates.
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