Capital Asset Investment: Strategy, Tactics and Tools by Anthony F. Herbst

By Anthony F. Herbst

Delivering a balanced and useful method of capital administration and budgeting, this publication covers the whole spectrum of capital investments, from the fundamentals in the course of the most up-to-date ideas. it truly is aimed toward managers who're considering capital funding judgements: surroundings corporation capital funding coverage; acting undertaking analyses; and drafting options. these in most sensible administration will reap the benefits of discussions of sturdy and susceptible issues of assorted tools and concepts.Included within the arsenal of capital funding instruments during this publication are thoughts of confirmed usefulness, reminiscent of the MAPI approach, now not on hand in different works relating to capital budgeting, and different subject matters no longer lined in different places, resembling abandonment research.

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Given that money has time value, to do otherwise would not be in the best interests of the owners of the enterprise. The more rapid the rate of price inflation, the more incumbent it is to charge the maximum depreciation in the early years for tax purposes. However, for management control purposes the firm may use the depreciation schedule that is considered to match most closely the actual economic deterioration in the capital project from year to year. Yet, with high rates of price inflation in capital goods, the depreciation charged against the original cost if unadjusted may be of little usefulness.

For example, a firm that produced automobile fabric convertible tops and decided in 1970 to acquire new automated equipment to stitch the seams, predicated on a 15-year useful machine life, would have found in 1976 that original equipment market sales were vanishing. In 1976, Cadillac, the last of the United States automakers to produce fabric-covered convertibles, announced it was phasing out such models. Unless the replacement market would continue to provide sufficient sales into the mid-1980s, the firm would need to find alternative products suitable for production on the specialized equipment.

The answer to this question may be found in evaluating the merit of investing today with replacement when the technologically improved capital becomes available, and evaluating the merit of the alternative — that of postponing investment until the improved capital is available. Comparison of the merits of the alternatives will serve to determine the better course of action. Methods for performing such analysis, once the net cash flows are determined, are covered in Chapters 9 and 23. The subject of technological obsolescence in capital budgeting is not limited to the firm’s physical capital; it may apply also to the human capital of the enterprise, and certainly does apply to the product lines on which the cash flows of investment projects are predicated.

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