Someone recently bought our

students are currently browsing our notes.

X

Capital Investments And Strategy Notes

Accounting Notes > Managerial Accounting Notes

This is an extract of our Capital Investments And Strategy document, which we sell as part of our Managerial Accounting Notes collection written by the top tier of LSE students.

The following is a more accessble plain text extract of the PDF sample above, taken from our Managerial Accounting Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Lecture 3: Capital Investments and Strategy Summary

* Extending the financial analysis

* Valuing flexibility in capital budgeting

* Managing flexibility in capital budgeting Extending the Financial Analysis

* Projects with a good NPV may turn out disastrous in strategic terms
* It can undermine long-term competitiveness and profitability

* Projects with a negative NPV may generate very important strategic opportunities to be exploited in the future

Why do many investments in new technologies appear as unfavourable if analysed only using NPV?
* Excessive hurdle rates
? This penalizes long term benefits
* Failure to identify alternatives correctly
* Incrementalism
* Short-term productivity declines
* Intangible benefits Example of investments in new technology (Kaplan, HBR 1986)

*

Example of NPV analysis of technology investments (Shank and Govindarajan, SMR 1992)

*

* We must also take into account strategic elements into financial decisions:
* Value-chain effects

Course Notes Page 13

Key Points

* Problems with NPV and new technology investments

* Value-chain and cost driver effects

* Equipment appraisal

* Limitations of financial appraisal

* Options

* Limitations of options

* Managing flexibility Definitions

* Call option = right to buy a security at a predetermined price p* (exercise price) at a certain time t* or before t* (maturity date), after which the option disappears

* Real option = opportunity to invest at a predetermined cost at a certain time t* or before t*, after which the option disappears

Buy the full version of these notes or essay plans and more in our Managerial Accounting Notes.