Cost Management: Measuring, Monitoring, and Motivating Performance, 2nd Edition

CHAPTER 12

Strategic Investment Decisions

In Brief

Managers periodically make decisions about long-term investments for new projects or replacement of old assets. These decisions focus on creating long-term value consistent with organizational strategies. The outcomes from these decisions are generally more uncertain than shorter-term decisions because we forecast further into the future. In addition, the time value of money also becomes important.

This Chapter Addresses the Following Questions:

• Q1 How are strategic investment decisions made?
• Q2 What cash flows are relevant for strategic investment decisions?
• Q3 How is net present value (NPV) analysis performed and interpreted?
• Q4 What business risks and limitations affect NPV analysis?
• Q5 What alternative methods (IRR, payback, and accrual accounting rate of return) are used for strategic investment decisions?
• Q6 What additional issues should be considered for strategic investment decisions?
• Q7 How do income taxes affect strategic investment decision cash flows?
• Q8 How are the real and nominal methods used to address inflation in an NPV analysis? (Appendix 12A)

KEEPING AN EYE ON CHINESE MANUFACTURING CAPACITY

Managers throughout the world monitor the manufacturing capacity trends in China as they evaluate whether, when, and where to locate their own new facilities. In recent years, manufacturing capacity in China has grown ...